Banks Find Foreclosure More Efficient than Loan Modification?
In this paper they search for the underlying reasons for the foreclosure crisis and WHAT should be done to stop it. What I find interesting is their comments concerning the reasons for the low number of Loan Modifications to date. And here they conclude…
“Regarding the small number of loan modifications to date,we show, both theoretically and empirically, that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modificationsthan contract frictions related to securitization agreements between servicers and investors.”
So the Servicers excuses that their PSA’s (Pool Servicing Agreements) with the Investor’s were preventing them from modifying more home loans is apparently not true. The real reason for the low number of loan Modifications versus Foreclosures is apparently because it’s more efficient to Foreclose than to modify a Loan!
But WHAT does more efficient mean? Easier to Foreclose on a Home than to negotiate a loan Modification? It certainly isn’t MORE profitable for the Investor.
A.M. White in his paper Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications, stated. “Servicers are incurring huge losses for investors by foreclosing. The average foreclosure loss on a first mortgage in November 2008 was $145,000 or about 55% of the average amount due. In comparison, for the modified loans with some amount of principal or interest written off, the average loss recognized was $23,610. This seven-to-one difference between foreclosure losses and modification write-offs is striking, and lies at the heart of the failure of the voluntary mortgage modification program.
So Why do Banks Foreclose when they can Modify a loan? Foote and Willen write:
“Estimates of the total gains to investors from modifying rather than foreclosing can run to $180 billion, more than 1 percent of GDP. It is natural to wonder why investors are leaving so many $500 bills on the sidewalk.”
So if the Investors are losing 7 to 1 more money in Foreclosure then WHY IN GOD’S NAME are they Foreclosing on Homes? It’s Insane! It makes NO SENSE, But logical thought in the Banking Business in my humble opinion is NOT RECOMMENDED!
What’s truly lacking in ALL of the Professor’s studies and papers on the Foreclosure Crisis is the LACK or ABSCENCE of compassion for the Borrower. Their studies are ALL numbers and percentages, graphs and formulas. Like some Military Generals acceptable collateral losses on the battlefield. But this crisis is about real people and families being destroyed and not just numbers for the Federal Reserve to study! What the studies really should be focusing on is what the process of a loan modification is really like and the way in which the Banks are presenting them. Until you uncover how they are being processed in the interests of the Bank first, Borrower last we’ll never improve the percentages of homes saved.
In reality the Banks really DON’T want to do Loan Modifications. They aren’t in the business of lowering payments and loan balances. They have Great PR and arrive to speak to the President over lunch on their efforts to help the Homeowner, but the numbers of those receiving help are well short of their promises. It will take a Herculean effort to change the Banks cultural attitude about this Foreclosure Crisis. Until the Government makes the Loan Modification programs mandatory and not voluntary the results in avoiding Foreclosure will be dismal. And millions will continue to lose their homes.
Uppitybanker
