A VERY common question from my callers is about this:
“Why won’t the bank just reduce the amount of my loan instead of taking my home and then selling it to someone else for way less than I would have been happy to pay?” It’s a question that gets asked repeatedly these days, especially by people who are facing foreclosure or are upside down on their mortgages. I will not only reference my opinion on this situation but will also give you expert’s points of view in order for you to understand why they cannot just lower your balance and move on.
A very good question with a very complicated answer, for my own opinion I will like to start with a full understanding of who actually owns your loan, by now you have probably heard this repeatedly that your lender might just be your loan servicer. Meaning, they are just being paid by the actual investors (note holder) to receive your payments, thus called loan servicer. The problem is you actually cannot get a hold of the actual note holder because it does not work that way and that is probably why they hired these big banks like BOA, Wells, CITI, and CHASE etc. to service these loans.
Therefore, if you can’t talk to them you will have to rely on your loan servicer’s advice as far as what the note holders guidelines are in regards to loan modifications or loan balance reduction.
Secondly, if you were able to reduce your loan balance because your property is under water, then your neighbor will want that too, I will want a loan balance reduction too, regardless of anyone’s current financial situation this will create a social imbalance and will actually create a huge funnel that will drive real estate prices spiraling down very quickly.
But you are telling me that you might know someone that had a principal balance reduction on their mortgage right? My answer to that is try to get the full picture of that situation because I have not had very much luck with my readers calling me back with that great news about their loan modifications.
For the answer, we turned to Jack Guttentag, the Mortgage Professor and Inman columnist. Guttentag believes that lenders have been too stingy when it comes to reducing loan balances. Private lenders have offered loan reductions only sparingly, he says, and Fannie Mae and Freddie Mac not at all.
Here’s the professor’s take on why homeowners can’t catch a break on loan reductions.
1. The buck stops there.
The decisions to reduce principal loan amounts are made by the firms that service mortgages – the same folks who brought the country the robo-signing scandal. As servicing firms, anything they decide must be in the financial interest of their client – that’s your lender, not you. If they depart from customary practice – and writing down loan balances is a departure from customary practice – the buck stops with them, Guttentag says. In other words, who’s going to take the risk of reducing Joe Homeowner’s loan amount and then have to explain it to the boss? To take Nancy Reagan out of context: They just say no.
2. Banks are in the business of making money.
No lender is going to write down the balance of a loan in default just because you owe more than the home is worth. Truth is, there is no benefit to the lender to helping Joe Homeowner keep his house instead of selling it to the next guy. Plus, to help Joe would eliminate the possibility that the bank could also get a deficiency judgment against him. Banks are in this for the squeeze and think of Joe as just the orange. Nothing personal, of course.
3. In this economy, you will likely default anyway.
Sure, you want to believe that the economy is going to turn around and the value of your home will again rise to what you paid for it. After all, hasn’t listening to a fairy tale been a surefire way to fall asleep?
From the lender’s standpoint, the only reason to write down a loan balance is that it will reduce the chance that you will default. And evidence has shown that people who are heavily underwater – that’s deep in negative equity territory – are more likely to default than those who aren’t. Truth is, negative equity discourages people from making their mortgage payments. They figure: Why keep throwing good money after bad?
4. Banks are short-staffed and the staff they do have is untrained.
Most interactions between mortgage borrowers and servicers are handled by computers or relatively unskilled employees, says Guttentag. Borrowers in serious trouble are referred to a smaller number of more skilled and specialized employees, but until you enter the red zone, you are likely to encounter frustration.
Guttentag says that at the onset of the mortgage crisis, servicers were caught short-handed and the sheer volume of foreclosures in the pipeline hasn’t allowed them to catch their breath.
5. Mortgage insurance works against you.
When mortgages carrying mortgage insurance go to foreclosure, banks are protected up to the maximum coverage of the policy, which generally is enough to cover all or most of the loss. This discourages modifications, says Guttentag. Why would a bank do a modification for $15,000 if the $40,000 foreclosure cost is going to be paid by the mortgage insurer? Even if the insurance coverage falls short of the foreclosure cost, the shortfall has to exceed the modification cost before modification becomes financially more attractive.
There is a new saying about what is going on with bank and their toxic loans, “Extend and Pretend” they kept extending the foreclosure proceeding and pretending it is not going to happen.
Here is what we are to expect the next 2-4 years per experts.
• Commercial properties continuing to suffer the next 4 years
• Average 6.26 million mortgages are delinquent, 11 million underwater.
• Just by banks foreclosing on these 1.5 million homes, that itself will drop real estate prices by an average of 20%.
My best solutions have to be suggesting that housing start to come back strong, 160 jobs created in building a house. It will take 115K new jobs per month just to hold the unemployment rate at the status quo. To drop the unemployment rate 1% it would take 1.53 million new jobs or 125K/ month. But here is the lying problem:
• Builders are not going to build until we eliminate housing foreclosure problem.
• Average of 1.5 foreclosure per year, we need 4 years to sell these homes.
* * *
Therefore we need a lot of help and people to all understand and unite together to help each other. Please call Ken if you have any suggestions or inquiries about your current mortgage or real estate needs. Call Ken of 1st Innovative Finance 562-697-7028 or write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
(Advertising Supplement)
| < Prev | Next > |
|---|
