General Question

Jaxk's avatar

Why is it so difficult to get a mortage modification?

Asked by Jaxk (10078 points ) May 26th, 2011

I have wondered why the banks would not want to help keep homeowners in their homes. It would seem that it would be cheaper to modify the mortgage than to foreclose and short sell the property for a massive loss. There is a video that helps to explain this. Is this how a managed economy really works? Have we created a scenario where it is more profitable for the banks to foreclose than to work with the homeowner?

Observing members: 0 Composing members: 0

10 Answers

Tropical_Willie's avatar

It is the bank’s property and they want to control it ( not to profit from it ). Sometimes they will work with the owner. But not if there is no short term way of recouping the money. A house worth 50 % of the mortgage balance is bad investment.

Bottom-line for the bank is to EXIT from any bad business investment.

Jaxk's avatar

@Tropical_Willie

I would agree if it were a bad business arrangement. Unfortunately what has happened is the bad loan has become extremely profitable. Thanks to the generosity of our government.

Tropical_Willie's avatar

Not all of the loans were profitable to the bank. How many of the loans for “trashed houses ” were there? The entire mortgage portfolio was bought by the gaining bank at a discount. The single example giving in the video may have been the ONLY profit made. The “hasty conclusion” is the single example does not cover all the population, basing a broad conclusion upon the statistics of a survey of a small group that fails to sufficiently represent the whole population.

We could pay cash for houses, ride bicycles to work and raise cows in the back yard.

Cruiser's avatar

Because…
Obama, in his weekly address on the radio and Internet, said the legislation will ensure that consumers get the information they need to make financial decisions and “level the playing field” by subjecting all lenders to tough oversight.”

I recently got a new mortgage and a business loan and it was a fucked up experience at best. Even though I have an over 800 credit rating I still had to provide an enormous amount of credit history and still barely got the loans. The business loan itself required dollar for dollar collateralization and I was almost like I don’t need the bank then if I have to do THAT??!!

My old boss despite having millions in the bank can’t refinance his house because he no longer has a job!! WTH!

crisw's avatar

We just went through a HAFA short sale/deed in lieu. It was one of the most ridiculously asinine experiences ever- riddled with inefficiency and bumble-headedness from start to finish.

One of the main reasons that banks are dragging their feet on loan mods is that many borrowers who receive modifications default on their loans anyway.

cockswain's avatar

I don’t know the answer, but as an anecdote, my buddy and his wife have excellent credit and had to jump through hoops to buy a new house. They have a household income probably around $110,000, we’re moving out of a $200,000 house they made a profit on, and were trying to buy a $225,000 house. The hoops they had to jump through to get approval on the loan were insane. They had to patch a small hole in the stucco, remove bars from windows, tear down a garage that wasn’t structurally sound anymore, and (this is the one that really gets me) scrape and repaint the soffits. That was insane. They moved in eventually, but had many near homeless moments. Oh, and the wife was 8.5 months pregnant.

YARNLADY's avatar

It’s mostly a backlash from the days of too easy credit, but also as @crisw points out, the people who need it the most are usually the worst risks.

Jaxk's avatar

@Tropical_Willie

There were over 250 bank failures since 2008 (including WasMu, which was the biggest). The assets were sold under similar conditions to the example given in the video. If the assets were sold at 50–70% of value (typical) and the FDIC is paying 80% of the original value, the bank can’t lose. No matter how torn up or beat down the property becomes. In fact the bank does better by foreclosing than if you continue to pay the loan on time. We have set up a system where foreclosure is not only their best option but is actually the preferred option (they make more money). Something has got to be wrong with that system.

Tropical_Willie's avatar

@Jaxk Don’t buy a house with an inflated appraisal, or leverage so high in a market that is growing in value at 15 % per year.
Foreclosure is not half of the houses in the USA, they maybe a HIGH percentage of houses on the market. There will probably be a new batch of new foreclosures coming in June and July, the inventory on foreclosures has dropped.
The gaining bank does not have any guarantee that the assume assets have a market value of what was the price, when buying the failed bank. Selling a million dollar home for $375,00 because that is current market value.

The term toxic assets come to mind.

Jaxk's avatar

@Tropical_Willie

I agree that there is likely to be another round of foreclosures. And the current scenario isn’t helping.

If you look at the million dollar scenario you posted, the loss would be $625,000 ($1000,000—$375,000). Since the FDIC kicks back 80% of that loss, the banks receives $500,000 from the FDIC. Add that to the $375,000 they got from the sale and they made $875,000 on an asset they probably bought for $6 – $7 hundred thousand. An easy no risk profit of ~$250K Or about 30%) in only a couple of years. Hell, if the property dropped to zero (even the land wasn’t worth anything) they’d get $800,000 from the FDIC. They can’t lose. Sounds pretty lucrative to me.

That doesn’t fit my definition of toxic.

Answer this question

Login

or

Join

to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
or
Knowledge Networking @ Fluther