Lenders benefit from foreclosing rather than opting for other alternatives

August 5th, 2009

The steps being taken by the administration to contain foreclosures are not giving results because lenders benefit from foreclosing rather than opting for other alternatives. In foreclosure they gain more rather than from government offered carrots.

The policy makers repeatedly say that it is best for all concerned if the borrowers are given a break on their mortgage payments so as to allow them to continue to reside in houses that are their homes. But the researchers and experts of the mortgage world say that foreclosing is more profitable for the bankers and lenders.

For bankers modification is viable only for a particular group of borrowers. The lenders have to handle three different kinds of borrowers. Modification makes sense to the bankers if the borrowers cannot keep up with the current payment schedule but will be able to do so under a new agreement having more easy terms.

The second set of borrowers is those who default even after modification and in all probability will forfeit their houses either way. Lenders are reluctant to help this set because waiting to start the foreclosure process can lead to more losses.

Lastly are those delinquent borrowers who can, albeit with great difficulty catch up with the loan even without modification. Lenders have no incentive to modify and lessen their loan amounts; by doing so again they lose what would have come to them in any case.

It is these financial considerations by the lenders that are placing hurdles before the remedial measures undertaken by the Obama government. The officials of the Treasury and HUD are conferring with the heads of the mortgage industry to see what can be done to expedite the measures. Billions are being offered to the lenders so that they become more proactive in the vital matter – crucial to the health of the economy.

Meanwhile foreclosed houses are rushing into the market pulling down the real estate. This led to a surge in sale of residential units in June as reported by the Department of Commerce.

Michael Fratantoni of Mortgage Bankers Association who is doing research on single-family homes said, “There has been this policy push to use modifications as the tool of choice.” But “there is going to be this narrow slice of borrowers for which modifications is the right answer” The difficulty is identifying them.

“The industry and policymakers have been grappling with that.”