Many analysts have noted that lenders are often better off doing a loan modification with principal reduction than going through the foreclosure process. Despite this fact, lenders would rather foreclose and lose more money than do any kind of principal reduction. Why is that?

Asking Price: $692,800

Address: 33 Canopy, Irvine, CA 92603

{book5}

Clocks — Coldplay

Confusion never stops

Closing walls and ticking clocks

Gonna come back and take you home

Cursed missed opportunities

Am I a part of the cure?

Or am I part of the disease?

Forgiveness is the supreme act of kindness. The beneficiary of forgiveness is not the person being forgiven, but the person doing the forgiving. Carrying anger is both spiritually and physically harmful. That being said, don’t expect forgiveness from lenders any time soon.

There has been much discussion about whether or not banks should modify loans, including giving principal reductions, or if they should simply foreclose and move on. There are compelling financial arguments that favor loan modification and principal reduction; it is not going to happen.

Banks are fully aware of the moral hazard of principal reduction. Once they go down that road, it changes the behavior of borrowers everywhere. l last wrote about this in Crisis or Cure? In that post,I noted the following:

At the conclusion of Mr. Mortgage’s most recent post, he stated, “Bottom Line — after seeing these latest figures I am

more convinced than ever that the next step is wide-spread principal

balance reductions that will reduce the massive negative equity burden

in America and be a first-step to solving the mortgage and housing

crisis once and for all.” Widespread principal balance reductions are

occurring in a process known as foreclosure. Once a property goes

through foreclosure and is resold, the new buyer has a much lower

principal balance than the old one. That is what needs to happen.

Does Mr. Mortgage believe this is going to happen through voluntary

“gifts” of principal reductions to existing borrowers from the lenders?

That is what his statement implies. I rather doubt it. There is no way

to make this “gift” equitable, and the moral hazard would be extreme,

and the lenders will resist this to the bitter end. Look at their

opposition to allowing bankruptcy judges to reduce principal balances;

they would rather take the home back in foreclosure than allow

principal reductions even in the case of borrower insolvency and

bankruptcy. Further, they have managed to kill that measure in the

Senate—a Senate completely controlled by an antagonistic Democratic

majority. Don’t expect to see either a voluntary or a politically

mandated effort at principal reduction any time soon.

At the bottom of the astute observations, there was this gem from grabasnorkel:

IR you and others

have mentioned the choice the banks face -> either mod the loan to X

amount or foreclose and get the same X amount. Seems like equivalent options, but they are not. The threat of

foreclosure has to be backed up with real foreclosures, if that threat

is watered down, it becomes less of a stick they can use with other

loans. We see some of that in the marketplace right now because many

people are expecting a loan mod and have therefore stopped paying on

their mortgage. It’s like a loan shark. When loans aren’t repaid, they have to break

bones, even if the borrower is broke. Even once in a while the borrower

is found dead – this has the purpose of keeping the threat real. If you f#%k a mafioso over hard, and skip town, he’s still going to

come after you to kill you even if he can’t get his money back. Why is

that? Or a credit card company. They don’t HAVE to ding your credit if you

default on a card, but they will. If they don’t then they won’t be

taken seriously and that leads to more defaults. Two years ago a guy at work told me the banks would be reluctant to

foreclose because they wouldn’t net anymore than they would by working

with the borrower.. He was wrong then, and is wrong now. Think about it

for a moment. I have been thinking about this comment for a couple of weeks, and I have come to the conclusion that grabasnorkel is right. The political behavior of lenders lends evidence to this same conclusion. Besides the lobbying for watered down legislation I mentioned above, consider the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005. The main purpose of this major legisltation was to make it more difficult to obtain debt forgiveness. When you really think about it, lenders will do just about anything to avoid debt forgiveness even if the short-term costs are higher. Hence, we have loan mods that do not forgive debt (but do create lifelong homedebtors) and we have foreclosures.

The result of bank lobbying and practices is going to be a huge wave of foreclosures. It is clear that Americans have too much debt and need significant debt reductions. We will modify those few on the fringe, and we will foreclose on the rest. That is just the way of things.

One final ramification of lender policy is going to be the long-term exclusion of the foreclosed from the housing market. Previously, I had believed that we would see a resurgence of subprime to serve the needs of those with good jobs and healthy downpayments. Now, I don’t think this is going to happen. If current debtors believe they will be given a home loan in 18-24 months after a foreclosure, many more people will default. Lenders are going to exclude this group from home ownership for years just to serve as a deterrent to others. Current GSE policy is a five-year waiting period before they will buy or insure a loan from a borrower who has gone into foreclosure. Despite political pressure likely to mount in the future, don’t expect this to change.

In short, overextended borrowers are in deep trouble, and lenders intend to keep it that way.

I have joked about the Banker’s Prayer. Do you think they will forgive us our debts? or are overextended borrowers in as much trouble as I say they are?

Asking Price: $692,800

Income Requirement: $173,200

Downpayment Needed: $138,560

Monthly Equity Burn: $5,773

Purchase Price: $870,000

Purchase Date: 12/6/2006

Address: 33 Canopy, Irvine, CA 92603

Beds: 3 Baths: 3 Sq. Ft.: 2,000 $/Sq. Ft.: $346 Lot Size: – Property Type: Condominium Style: Other Stories: 2 Floor: 1 Year Built: 2003 Community: Quail Hill County: Orange MLS#: U9002330 Source: SoCalMLS Status: Active On Redfin: 9 days

BANK OWNED!!! Premier Quail Hill condominium. Granite countertops and

stainless steel appliances, ceiling fans, travertine flooring &

berber carpet. Fabulous master bath with spa tub and marble accents.

This property was purchased on 12/6/26 for $870,000. The owner used a $696,000 first mortgage, a $87,000 HELOC and an $87,000 downpayment. That is all gone as the property went back to the lender on 2/11/2009 for $590,750.

If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $218,768.