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Posted by dan on December 20, 2008, 6:54 pm
We all know that banks are taking huge losses on foreclosed homes.
However, I don't understand why they aren't modifying more loans to
create either temporary or permanent terms that work for the home
owners.
Sure, they may need to reduce the interest rate or throw some of the
reinstatement amount to the back of the loan, but isn't that better
then taking a 20-30% loss when the property is sold as a bank REO?
If it's a portfolio lender I'd imagine that it would be pretty easy.
However, I am curious about the process for approval for a
modification when it's a loan that is bundled and sold on the
secondary market. Wouldn't investors who bought these securities be
better off with slightly modified loans?
AND... when a bank has an REO, why won't they offer financing, even at
a very high rate to riskier borrowers, just to get the home sold at
full market value. I know banks aren't in the business of real
estate, but even if they have to take the property back and try again
it seems like it would be a better option than just taking that huge
loss up front.
I know that I'm no expert on this, but I'm really curious what
everyone thinks.
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Posted by on December 21, 2008, 7:11 am
>
> AND... when a bank has an REO, why won't they offer financing, even at
> a very high rate to riskier borrowers, just to get the home sold at
> full market value. I know banks aren't in the business of real
> estate, but even if they have to take the property back and try again
> it seems like it would be a better option than just taking that huge
> loss up front.
>
Because they don't want to take the loss twice. If you have a really
high rate of interest, the payments will be so high that you actually
drive up the probability of default and another foreclosure. You can't
set the rate of interest high enough to cover the probability of
default for the riskier borrowers. The problem is that when people can
buy with 5% or 2% down, they have so little skin in the game, the bank
practically owns the house. And if the interest rate is in double
digits the borrower never really builds meaningful equity for a long
time, so that the first thing that goes wrong, the homeowner is
tempted to walk away. If the thing that went wrong is that the value
of the house declined even further, then they are doubly likely to
just walk, but in effect they have no equity at all.
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Posted by on December 21, 2008, 7:11 am
> We all know that banks are taking huge losses on foreclosed homes.
> However, I don't understand why they aren't modifying more loans to
> create either temporary or permanent terms that work for the home
> owners.
>
Because if they did this for the 1% (or 2% or 5% or 10%) of their
loans that are going into foreclosure, the rest of their portfolio
would start sliding downhill fast. When the word gets around that if
you are upside down on your mortgage, you can get a modification if
you start missing payments, their phones will be ringing off the hook
and their cash flow will dry up. Not to mention the number of loans
that will actually be in a non-performing status will skyrocket, which
is really poisonous for a bank. I am sure lots of people will be
willing to trash their credit for a fixed rate loan that they could
never now qualify for, plus a reduction in the principal, which might
be worth tens or even hundreds of thousands of dollars to the
borrower.
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Posted by Elizabeth Richardson on December 21, 2008, 12:57 pm
> We all know that banks are taking huge losses on foreclosed homes.
> However, I don't understand why they aren't modifying more loans to
> create either temporary or permanent terms that work for the home
> owners.
>
There are many banks starting to do this. I know because my daughter is
going to do it.
Elizabeth Richardson
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Posted by Sure,Not on December 22, 2008, 12:55 pm
On Dec 21, 12:57 pm, "Elizabeth Richardson"
>
>
> > We all know that banks are taking huge losses on foreclosed homes.
> > However, I don't understand why they aren't modifying more loans to
> > create either temporary or permanent terms that work for the home
> > owners.
>
> There are many banks starting to do this. I know because my daughter is
> going to do it.
>
> Elizabeth Richardson
Slipery slope.
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