lenders may WANT more foreclosures
The old assumption that lenders will do anything to avoid having mortgage holders default and go into foreclosure may not be so true anymore. In many cases the lenders don't actually own the underlying mortgage (having sold it to investors) and are primarily interested merely in collecting fees for managing the mortgage portfolio. Ironically, a foreclosure may result in more fees (which are paid out of the over-all income stream from a mortgage security pool) being generated than if the home-owner remained current on the loan.
The implication of this is that many lenders (or mortgage servicers) might be much less flexible to work with a struggling mortgage holder than one would suppose. This could also lead lenders to be reluctant to enter realistic negotiations with possible purchasers of foreclosed properties. Selling the home would mean the loss of a management fee for the property, whereas keeping the house in foreclosure allows the income stream to continue. Worse, there can be penalties for the servicer of a mortgage to take a significant loss on a managed property.
I am not saying that all banks and lenders prefer foreclosure to working out problems with borrowers, but the old assumptions about the motivations of lenders aren't universally true anymore.
The implication of this is that many lenders (or mortgage servicers) might be much less flexible to work with a struggling mortgage holder than one would suppose. This could also lead lenders to be reluctant to enter realistic negotiations with possible purchasers of foreclosed properties. Selling the home would mean the loss of a management fee for the property, whereas keeping the house in foreclosure allows the income stream to continue. Worse, there can be penalties for the servicer of a mortgage to take a significant loss on a managed property.
I am not saying that all banks and lenders prefer foreclosure to working out problems with borrowers, but the old assumptions about the motivations of lenders aren't universally true anymore.
Comments
Unfortunately, re-working the loan to avoid foreclosure violates the security contract terms just as much as actual foreclosure. The buy-back clauses generally state that the originator must buy back the loan if there is a payment delinquency within the first 6 months or so. Avoiding actual foreclosure by modifying the loan wouldn't help the lender avoid a repurchase.
I would add that the buyback clauses are not enforceable when the orginator goes out of business, or files bankruptcy. In many cases, these CDO buyback clauses went all the way back to the brokers who first sold them.
It was entirely predictable that these shady fee-based, transaction fee shysters would shut down their operations once they saw the writing on the wall, and they indeed did that, and continue to do that. This was designed as a way to make the liabiliy go poof.
Yet, these securities were top rated, everyone was making money while the ponzi-scheme gravy train rolled. For them to cry hardship now are the tears of a crocodile....