What is stopping banks from modifying loans prior to foreclosure?

We all know that banks are taking huge losses on foreclosed homes. However, I don't understand why they aren't modifying more loans to create either temporary or permanent terms that work for the home owners.

Sure, they may need to reduce the interest rate or throw some of the reinstatement amount to the back of the loan, but isn't that better then taking a 20-30% loss when the property is sold as a bank REO?

If it's a portfolio lender I'd imagine that it would be pretty easy. However, I am curious about the process for approval for a modification when it's a loan that is bundled and sold on the secondary market. Wouldn't investors who bought these securities be better off with slightly modified loans?

AND... when a bank has an REO, why won't they offer financing, even at a very high rate to riskier borrowers, just to get the home sold at full market value. I know banks aren't in the business of real estate, but even if they have to take the property back and try again it seems like it would be a better option than just taking that huge loss up front.

I know that I'm no expert on this, but I'm really curious what everyone thinks.

Reply to
dan
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Because they don't want to take the loss twice. If you have a really high rate of interest, the payments will be so high that you actually drive up the probability of default and another foreclosure. You can't set the rate of interest high enough to cover the probability of default for the riskier borrowers. The problem is that when people can buy with 5% or 2% down, they have so little skin in the game, the bank practically owns the house. And if the interest rate is in double digits the borrower never really builds meaningful equity for a long time, so that the first thing that goes wrong, the homeowner is tempted to walk away. If the thing that went wrong is that the value of the house declined even further, then they are doubly likely to just walk, but in effect they have no equity at all.

Reply to
themightyatlast

Because if they did this for the 1% (or 2% or 5% or 10%) of their loans that are going into foreclosure, the rest of their portfolio would start sliding downhill fast. When the word gets around that if you are upside down on your mortgage, you can get a modification if you start missing payments, their phones will be ringing off the hook and their cash flow will dry up. Not to mention the number of loans that will actually be in a non-performing status will skyrocket, which is really poisonous for a bank. I am sure lots of people will be willing to trash their credit for a fixed rate loan that they could never now qualify for, plus a reduction in the principal, which might be worth tens or even hundreds of thousands of dollars to the borrower.

Reply to
themightyatlast

There are many banks starting to do this. I know because my daughter is going to do it.

Elizabeth Richardson

Reply to
Elizabeth Richardson

Slipery slope.

Reply to
Sure,Not

They may belatedly realize that many of their borrowers are hopelessly uncreditworthy and that the choice is not between foreclosure or slightly lower payments from a modified loan but between foreclosure now and foreclosure six months from now after missed payments, as described in the article quoted below.

Here is another consideration. Obama talked during the campaign about a 90-day foreclosure "moratorium" for homeowners "who are acting in good faith." Litigating what is meant by "good faith" is not something lenders are eager to do, so it may be safer for them to foreclose before the incoming president tramples on their property rights.

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601087&sid=aZfUsedWrv5o&refer=homeMajority of Modified Loans Fail Again, Regulator SaysBy Alison Vekshin

Dec. 8 (Bloomberg) -- Most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months, the chief regulator of national banks said.

Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department?s Office of the Comptroller of the Currency, said today at a housing conference in Washington.

?The results, I confess, were somewhat surprising, and I say that not in a good way,? Dugan said, citing a third-quarter survey his agency plans to release next week.

Lenders and loan-servicing companies have been modifying mortgages by lowering interest rates or creating repayment plans through the voluntary Hope Now Alliance. The group, which includes Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., said last month it helped 225,000 borrowers keep their homes in October.

Foreclosures rose to a record in the third quarter as one in 10 U.S. homeowners fell behind on payments or were in foreclosure, the Mortgage Bankers Association said last week.

?Our third-quarter report will show many of the same disturbing trends as other recent mortgage reports,? Dugan said. ?Credit quality continued to decline across the board, with delinquencies increasing for subprime, Alt-A and prime mortgages.?

The OCC?s survey represents institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion, Dugan said.

Reply to
beliavsky

Banks are only modifying balloon loans only because the federal government can label that loan not valid and cause more of a loss for the bank due to predatory lending practices not regulated. The banks got away with murder allowing these practices and selling homes way over their value, because of this anyone who purchased in the past couple years is now upside down. Then they have the nerve to pin it on the consumer. The banks are acting like being upside down are normal terms when in reality its not. I reside in florida and it came a time when a one bedroom 700 sq ft condo was costing 300,000. Yet the unemployment rates are sky high and will go more up in the second quarter, banks are failing to see that if the unemployed homeowners mortgages aren't modified then they will continue to suffer. This is what's causing people to rip off there kitchen, bathroom and whatever they can take leaving the home worthless. So in reality when its all said and done the banks will lose more taking over these properties than working with the consumer.

Reply to
jimmyaramburo

Sure. When 10% of all mortgagees are both upside down and non performing, the banks are going to be more flexible. When 10% are upside down, but 90% of those are still paying, the bank would be crazy to be willing to let those 90% reduce their loan balances for the sake of the 1% that can't pay AND are upside down. This is a huge game of chicken. Blinking first is a losing strategy.

Reply to
themightyatlast

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