It’s something that I hear way too often! “Why won’t the bank reduce my rate, instead of losing all that money?”. I know, it seems to be so simple. Rather than pursuing a foreclosure or forcing a short sale, shouldn’t banks preserve their assets by modifying borrowers? It sounds like a “no brainer”, but the answer is more complicated than that.
Contrary to most opinions, banks are not stupid. They know that, regardless of interest rate, a homeowner who owes significantly more than the value of their home is at very high risk for default. Approximately half of homeowners, that received some kind of loan modification or payment assistance, have already defaulted. With that in mind, lenders do not look at modification as anything more than a band-aid. It is an even money bet that the homeowner who receives the loan modification will be right back in default within a very short period of time. As such, they need to be very cautious about handing out loan modifications without a great deal of scrutiny.
Most folks have noticed that there are far fewer banks than there were a few years ago. Wells Fargo took over Wachovia, Washington Mutual was gobbled up by Chase and Bank of America swallowed the poison pill better known as Countrywide. Those are just the ones that make national headlines! Large banks and even the FDIC have been taking over mortgage assets left and right since 2007. These enormous mortgage portfolios have been acquired at breathtaking discounts. Chase took over Washington Mutual for approximately 98% less than the face value of their outstanding mortgage dollars! If they foreclose or allow a borrower to sell short, rather than approve a loan modification, they are still making an incredible profit.
Remember, banks are just like you and I. They borrow money just like we do. Whenever they loan money, they need to either pay their own investors or borrow the money from other banks or the government. Even though the loans that they get are at very low interest rates, these loans are subject to interest rate changes just like all loans. If they agree to reduce a borrowers interest rate down to 2% for five years and interest rates increase in the next few years, they are still obligated to the terms of the modification. While it’s a great deal for a homeowner, it’s a terrible deal for the bank!
As a Realtor, I rely on market activity to make my living. If major lenders decided to reduce principal balances, that would prevent the resale of these homes to new buyers. Not only would that mean billions in revenue losses for brokers, insurers, termite companies, escrow officers, home inspectors and various other businesses involved in the housing trade, it would also reward homeowners who made bad financial decisions by allowing them to purchase their homes all over again for far less money and at outstanding interest rates! Discouraging or declining loan modifications may not be all that popular, but it may be just what the American economy needs to help aid in its recovery.
Get information on Homes For Sale In Rossmoor right on Jeremy’s site. Jeremy currently lives in Rossmoor with his wife, Heather, and their three children. For more information on Rossmoor Homes, make sure to follow the links.
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