Why Subprime Lenders Aren’t So Willing To Help
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.
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.