Why Subprime Lenders Aren’t So Willing To Help
January 19, 2009 by Danilo Bogdanovic
Filed under Lending/Mortgages
You've all probably heard the term "loan modifications" being thrown around a lot lately. It's being referred to by many as a way to help troubled borrowers and help soften the blow of the foreclosure and mortgage crisis. Many believe that if we lower the rate and/or change the terms on the subprime loans that are causing the very mess we're in, we'll be able to help borrowers while getting through this mess faster and with less destruction.
But not everyone feels the same way, especially the subprime lenders who gave out those sub-prime loans in the first place. After crunching the numbers, many subprime lenders feel that modifying subprime loans will cost them more than just letting those in trouble default and go into foreclosure.
Sound crazy?
Perhaps to you and I… But remember that these subprime lenders are businesses - they're concerned with their bottom line and shareholders, not the well-being of borrowers. If they have to sacrifice a few borrowers for the greater good of their bottom line, they will do so.
There's an excellent post by Rob Blake over at BiggerPockets.com on this topic. It reveals some recent Fed research and statistics that go along with the notion that subprime lenders would rather just let the inevitable (foreclosures) happen than help troubled borrowers.
Here's an excerpt:
So the researchers factored in the cost of the “accidental helping” of those who didn’t need it…which does occur when you do en mass loan modification ala Sheila Blair’s method. With this factored in, the subprime borrower now shows a negative “Net Gain” of -12.7%. The bank loses money even after reducing the principal amount…a no-win situation.
Combine this fact with the fact that 67% of subprime home-owner borrowers were going to pay in full without any help whatsoever, we get a reluctant banking industry when it comes to principal reduction loan mods.
Another argument Rob makes in his post is that "loan modifications" and other such help are actually delaying the inevitable and interfering with the natural course of the market. I believe that there is truth to that. But I share in his sentiment…
I say this with equal parts relief that the debate is over…and overwhelming sadness the only logical conclusion means, in this case, “help” turns into hindrance.
I really wanted it to go the other way…
Bottom lines…share holders…delaying the inevitable… All sad realities, but realities nevertheless.
Most lenders are not offering homeowners affordable plans, and that more than 50% of all loan modifications default again.
Furthermore, a loan modification company cannot guarantee the distressed borrower that their submitted documents for the modification will not be used against them by law enforcement in the future. Prosecutors will be going after borrowers for participating in fraud by overstating their true income. What this does is make any submission to the lender vulnerable unless you have the attorney-client privilege over your submission. (The same is true if a borrower submits financial statements to obtain a Deed In Lieu of Foreclosure or Short Sale.) Therefore, a loan modification should be a last resort- a legal maneuver not something done by Joe the Modifier.
NB,
You bring up great points - the 50% default rate of modified loans and the legal issues involved with loan mods.
Personally, I believe that if you lied to get your loan and can’t modify your loan because you’re afraid of getting caught lying before, you deserve to be foreclosed on (and to go to jail).
Buyers lying about income caused homes to price out of site for the rest of us. But if crooked small potato homebuyers cannot be helped neither should rich fraudster banks be bailed at future taxpayer expense.
Hi, interest post. I’ll write you later about few questions!
Hi, very nice post. I have been wonder’n bout this issue,so thanks for posting
Kelly - Thanks. I look forward to our email.
Katty - Here’s a real life example that happened last week…A friend of mine was just told by Chevy Chase Bank that they would not modify her loan regardless of her hardship. When she told them that she could not afford the higher payment once the ARM reset, they told her to miss a few payments and then do a short-sale.