Why Banks Don't Modify Loans

So the other day, a friend says to me:

"I don't understand. My house is $100K upside down, but the bank would rather foreclose, then modify my loan. I want to pay. They won't let me. They'd rather foreclose, where nobody's gonna buy the house, the bank will have to buy it and hold it, and they'll never get a penny from me because I aint got nuthin'".

My answer to him was that banks just don't do what's in their own financial interest. If they did, they wouldn't have needed 12 billion dollars from Congress in 2008 or whatever it was. You can't use common sense business principles with banks.

But there's a real question here, as to why banks don't modify loans, and why they'd rather foreclose than modify. There are a few possible answers.

#1 - Default/Foreclosure Insurance - Many loans are insured, and banks receive the full value of the loan on foreclosure. If a loan holder can get full value from insurance, why putz around with a borrower that may or may not be able to afford a modified payment amount?

#2 - Your Servicer Benefits From Foreclosure - In foreclosure-world, there's the party that owns the loan, and then there's your servicer. The servicer is like a manager--they collect your payments, calculate what you owe, send you notices, handle escrow payments, and, if needed, handle the foreclosure process.

In foreclosure, servicers get more money, because there's more work involved. And then there are fees that are made off of appraisals, inspections, and other items made necessary by the foreclosure. The servicer is in no rush to end this gravy train. It's like saying that you'll get $50 to mow the grass, but if the grass gets to be 2 feet high, you'll get $100. So...you'd naturally only mow the grass when it gets to be 2 feet high. When you get more money when things go bad, there's no incentive to make them better. As you can see, what's in your servicer's financial interest is not what's in the bank's financial interest.

The problem is that it's usually the servicer that makes the decision to modify your loan or not. See the conflict of interest here? Why get a loan out of foreclosure, when the servicer can let it drag on, and make more money?

#3 - Investor Guidelines - As I'll talk about in another post, many loans were included in loan pools, sliced and diced in the investment market, and invested in by investors. There's no one "owner" of your loan, so there's no one person that can make a decision on modification. There are only investors, who agreed to certain guidelines, and those guidelines often don't mention how or when to modify loans--after all, the investments were made years before the foreclosure crisis ever happened. The Plaintiff in your foreclosure case, is governed by those guidelines....and their hands are tied by those guidelines.

#4 - Tax Reasons - Foreclosures are losses for the bank. Those losses provide a tax benefit. This is one reason why many banks will foreclose, but then delay the foreclosure sale. They get the benefit of showing the loss on their books without actually having the property in their name.

Despite all this...I'm proud to say Weaver Legal Group gets some good results on our loan modifications. There are definitely tricks to the trade that can improve your odds. Come see us to talk about your situation. Call us for a free consultation, (954) 987-0515.