Loan Modifications Are Better Than Foreclosures

Posted by Jim DeBellis on June 28th, 2011

A friend of mine who has been dealing with his bank over a loan modification request told me recently that the banking industry was starting to seem like a Marx Brother’s movie.  I thought that was high praise that our financial wizards didn’t really deserve.  At best, the banking system’s handling of shaky mortgages today is more reminiscent of the Three Stooges, and even then you might have to leave out Moe, who could probably do a better job of it.

With Curly running the foreclosure department and Larry in charge of Loss Mitigation, it’s no wonder that the left hand doesn’t know what the right hand is doing.  And the victim is often the stressed out homeowner who’s being given the royal runaround by a big banking conglomerate.

You don’t have to look very long or hard to find the horror stories.  Just ask your friends and neighbors.  One couple I know thought they had a loan mod all set up with Bank of America last year.  After six months of dutiful on-time payments in accordance with the bank’s terms, they received a demand for full payment of all original mortgage amounts now in arrears, and quite impossible to pay now that they had accumulated for so many months.   The unexpected ambush resulted in a foreclosure and a short sale, leaving them with six figures due on a second mortgage and living in a small apartment with their new baby.  It seemed almost like a set-up.  It wasn’t, but it seemed like it.

What the Loss Mitigation department offers is not honored by the foreclosure arm.  Yes, people should be responsible for the loans they take, but the banks weren’t very responsible either.  A proper loan modification system could be a huge boon to homeowners, banks, and the housing market.  The sad part is that banks work against themselves internally to the detriment of all parties involved.  If the interest rate is lowered on a loan and several years are added to the end, a bank doesn’t even have to take a principal write-down.  In fact, they can even increase the face amount of the mortgage owed in return for lower interest and a longer term, and the homeowners can still pay less each month and stay in their home.

Or, the bank can foreclose and lose two-thirds of the face-value of the loan by the time all is said and done, and in the process they drive down property values and threaten their other mortgages, clog up the housing market with empty houses that fall into disrepair, scare buyers out of the housing market and weaken the broader economy, and force millions of families to rent – and their bad credit from the foreclosure takes away another potential mortgage customer for the bank.

The more they try to fix things, the more damage they do.  Yeah, it does kind of make you think about the Stooges trying to deliver a piano to a house at the top of a hill.  Or was that Laurel and Hardy?