Banks Should Modify Loans to Keep People In Their Homes
Oct.13, 2010 in
Real Estate
I had a chance to meet Scott Brown in Santa Monica earlier this week. Scotty is a real estate agent working on the higher end of the market with properties in Malibu. One might think that that part of the market would be immune to the foreclosure issues facing lower price points, but that’s not the case.
Scotty breaks down the ridiculousness of kicking people out of their homes rather than modifying their loans. Surely, it would be easier to adjust someone’s mortgage to the market’s realities than to boot them out, only to sell the property for pennies on the dollar.
October 14th, 2010 at 11:36 am
Well, it’s a little more complicated than that. A lot of these loans are governed by things called PSA’s, or pooling service agreements, if I’ve got the acronym right. When a loan gets spliced and re-spliced and bundled into various investments so that several parties own a portion of that loan in conjunction with hundreds of other loans, there are agreements about what, specifically, a servicer can do.
Some PSA’s state that a servicer may modify the loan under certain terms, and others state that servicers may not modify loans at all, even if the alternative is foreclosure. Even when servicers are allowed to modify loans, often the risk is then put back on to the modifying entity. In other words, if Bank of America is servicing a loan that is in default, and it goes to foreclosure, the loss may be shared with all investment parties. If they modify the loan, and then it goes into default (and there’s still a pretty high rate of default on modified loans too), then B of A could be stuck with that loss.
Bottom line, sometimes the servicers lose less money – or RISK losing less money – on a foreclosure than a potential modification. There has been a push to get legislative protection for servicers so that they would have more leeway in making loan mods. Then they shot themselves in the foot by apparently not following proper protocol in many foreclosure processes. Who wants to grant servicers any kind of immunity now?
And then you’ve got the problem of whom to foreclose upon? Houses that are already abandoned can’t just sit there in a foreclosure moratorium limbo. And getting too lax on foreclosures does create incentives for people to simply stop paying their mortgages. But there’s no doubt that the glut of foreclosures that doesn’t seem to have an end in sight is dragging down the housing market and the economy as a whole. There’s got to be a middle ground somewhere along the line that slows this train down at least a little.
October 14th, 2010 at 5:20 pm
Sounds noble.
How many of these foreclosures attempted to renegotiate before they were in arrears?
Is there not an opportunity prior to “foreclosure” to set new terms of the mortgage contract? If so that period may need to be extended and provisions made.