Are Foreclosures in Lenders' Best Interest?

Foreclosures Are Often In Lenders' Best Interest says a story from the Washington Post. But are they really?

But a study released last month by the Federal Reserve Bank of Boston was downbeat on the prospects for widespread modifications. The analysis, which looked at the performance of loans in 2007 and 2008, found that lenders lowered the monthly payments of only 3 percent of delinquent borrowers, those who had missed at least two payments. Lenders tried to avoid modifying the loans of borrowers who could 'self-cure,' or catch up on their payments without help, and those who would fall behind again even after receiving help, the study found.

The article goes on to quote industry insiders saying, essentially, "ergo, loan modifications don't make sense for lenders." That conclusion doesn't make a whole lot of sense itself. The reason that not a lot of loan modifications are being done is that not a lot of loan modifications offered by mortgage servicers make sense for borrowers. Most of the modifications don't actually decrease the cost of the loan very much and even in those that do, the total amount of debt on the property is still often $100,000 to $150,000 more than the property is worth, with no hope in sight (or 10 to 15 years, at least) for the property values to eclipse the loan amount.

The question I am asking myself constantly is "why aren't servicers doing more reasonable loan modifications?" I think there may be several reasons:

1. The old problem of who is really in charge with all of the mortgage backed securities and the conflicting interests of trustees, servicers, and bondholders in the trust. Servicers are the one's really calling the shots and it doesn't make a whole lot of financial sense for them to invest a lot in doing voluntary loan modifications, because they don't make a ton that way and open themselves to possible litigation if they do too many modifications.

2. I think that the financial services may be leery of doing too many modifications because it might encourage people who can actually pay the mortgage to ask for a modification. And they want those who can actually pay to keep paying the mortgage. If servicers had to rewrite everyone's loan that was underwater, half the mortgages in the country would probably have to be rewritten. I think they may want to keep these to a minimum, with no one getting a decent modification so that they don't go tell their friends what a great deal they got.

3. Probably most important--they don't have to. Because the prospect of modifying home mortgages in bankruptcy is now dead (at least for the time being), mortgage servicers can do whatever they want.

All of these problems create a real frustration for those watching homeowners who could afford a reasonable payment get washed out in the foreclosure deluge. I had a homeowner talk to me the other day who had worked out a loan modification with one of the larger mortgage servicers. Shortly thereafter, however, the loan was sold to another entity (of dubious distinction) that is insisting they will take nothing other than payment in full or they will foreclose and that they will not honor the servicers commitment to modify the mortgage. And there is little this person can do about it. The mortgage servicers hold all the cards.

Good Article from WSJ.com Regarding Benefits of Bankruptcy

This is a good article from the Wall Street Journal regarding filing for bankruptcy. A few important excerpts from the article:

There's a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it's a sign this country's social safety net has failed.

It isn't. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy.

And some additional good advice:

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

NBI | Nuts and Bolts of Bankruptcy Law | Live Seminar

Mr. Fear will be speaking at a Nuts and Bolts of Bankruptcy Law seminar sponsored by the National Business Institute on August 5, 2009.

Foreclosure rates up in Fresno

The Business Journal is reporting that foreclosure rates in Fresno are up from 2.1% of all single family residences in foreclosure last year at this time to 3.5% this year. That is an increase of 67% over last year's historically high foreclosures.

The interesting thing about this statistic is that a lot of mortgage companies are actually delaying foreclosures in some cases because they don't have the capacity to liquidate all of the properties and they don't want the liability of dealing with a lot of property on their hands. Consequently, I often have clients who want to surrender a property to the creditor where it will take 6 or even 12 months before the mortgage company will start the foreclosure process. Then, it takes another 6 months or so to complete the process. These numbers could be a lot higher.