Loan modifications were going back into default at a rate of 50% by the design of 2008, which looked like a disaster at the time. Fitch Ratings has now come out with re-default estimates of 65 to 75% that make the end of 2008 numbers look positively rosy. Banks cannot carry the responsibility for these failures alone as there is plenty of blame to go around, starting with the economy. Still, modifications that fail, especially when done squarely plus homeowners, provide some sanative and/or relief on the banks’ side of the ledger. What follows is a list of benefits that can accrue to a lender by offering loan modifications that they know are nought going to work.
Gradual versus immediate and steep losses – Executing a loan modification results in a loan that carries less value for the investor. These losses are recorded when mortgages in the investment tarn are “marked to market” to philosophize a lower incoming interest payment or a reduction in principle. The less an interest rate is clear down, the less a advance loses value. By stair stepping the reduction in value of the loans investors at least placate their write downs handy taking them over time. Whether the homeowner can afford the loan is immaterial.
Banks get to tell the media that they are doing loan modifications – Financials, think AIG, need as much positive press as they can get their hands on. When BankAmerica recently said they had done 50,000 loan modifications nobody was asking how many were early in default.
Banks obtention to tell the politicians that they are doing loan modifications – More positive press because the banks are doing what everybody wants them to do. “We are no longer intentionally burying borrowers in properties we knew they couldn’t afford. We are helping them to stay in their homes.
Re-defaults allow the banks to go back to Congress, say the government plan isn’t working, et sequens demand more bail-out money – Enough said.
It would obviously be better for everyone if all lend modifications worked out, real manor prices stabilized, and they all lived happily ever after. Unfortunately, we’re soon not in that kind of environment. What we are in is an “every man for him” situation where the casualties will be counted later. Homeowners would be well-served to remember that, especially if they’re thinking of going it alone for their loan modification. Visit us at 800debtsettle website