Sure, foreclosure ultimately costs the bank more money than a modification would. But foreclosures these days take a long time — as much as 18 months in some states. And all that time the banks can keep the loans on their books at inflated values. Daniel Alpert, the managing partner of Westwood Capital, calls this practice “extend and pretend.” In fact, he said, he has been hearing that banks aren’t even willing to conduct so-called short sales anymore. Those are sales where the borrower asks the bank to sell the house for whatever it can get, and the bank in turn lets the borrower walk away from the loss that results from the sale.
“Banks are saying no because they don’t want to take the loss,” said Mr. Alpert. “They would rather foreclose. That is just wrong.”
And the laggards? Starting next month, the government plans to begin publishing data showing which servicers are doing well and which are doing poorly, thus trying to shame them into doing the right thing. And, of course, there is that July 28 meeting, in which all these points will be made, I suspect, rather forcefully.
Apparently, the only incentive left is a good swift kick in the rear."
The mortagage industry is still a mess and the banks are still such dickheads.
The problem is this, the banks are still putting all these stressed and inflated loans at on their assets so they can declare profits for the past months this year. But those stressed loans are still on the books and if they don't get modified to lower value, the foreclosures are going to hit hard and fast again next year and the financial system will be rocked one more time. This is why the Federal Government is calling all the parties to a meeting on July 28 and simply put guns on everybody's head, start doing loans modifications and declare the loss or else.
So if you purchased a home at $500,000 at the peak of the bubble in 2007, right now the value of your property most likely have fallen by 35%, which brings your current home valued at $325,000. So now you are stuck with a mortgage at $175,000 loses. Combine this with financial crisis, etc, your ability to pay the monthly charge might be diminished else well. So the options are either:
- Walk away from your loan + paying any charges, if any, to the loan and lose your home.
- Stop paying your loan until the bank take away your house.
For the bank, forclosure is bad because it will not get anywhere close with the value house sold + paid loan.
So if the bank has had the mortgage only for two year, it might have received only $40,000 dollars from you. Selling the house in an auction might get them $300K (if they are lucky, especially in a massive meltdown like now), so that's a total $340K out of $500K, at 160K loses. The better deal for the bank and for the loan holder is to reduce the amount of mortgage, so both parties take loses - but not as much as if they don't renegotiate it. The bank still get their monthly payment and the loan holder still stay in their homes.