The Loan Modification Debacle

In an article written by Ms. Podmolik that appeared in the Business section of the Chicago Tribune, I guarantee you the only real point in this story was missed by 98% of those who read it. In following the attempts of a couple individuals who have been trying in vain to have their loans modified, it's easy to see that banks are frustrating matters by their lack of motivation in pursuing a loan modification that would allow the borrowers to stay in their homes. Like all loan modification attempts, it seems like the banks just don't know how to get out of their own way as honest homeowners attempt to keep their homes.

The problem here is a simple one. First, banks are awash in procedural folly, a check and balance system that is way over cautious, and doomed to self regulate to a degree that they’ve begun to operate more like inefficient governmental agencies than private sector corporations. While I hate the way banks are doing business, I do not blame them for their lack of efficiency or motivation in dealing with loan modifications, because there's a very hard truth that most of us just don't understand... Your bank doesn't want to modify your loan.

Your bank is like your brother. You're 8 and he's 10. He calls you a name, so you punch him, your mom, always looking for reasons to blame you for the strife, tells you to apologize to your brother. You know it was his fault for starting the trouble, but you apologize, with an under the breath "sorry" while you storm into your room for an afternoon of playing with the 1986 style Transformers. You're the bank. The bank feels slighted in this process, but has been told by a tweed-jacket-with-leather-elblow-patches-wearing Obama that they should be granting these modifications, so the bank gives a have hearted attempt at the loan modification that it's being forced into by the socialist Federalies.

Whether or not your bank has a nice little section on their website regarding the "Hope for Homeowners Act", or some warm hearted story about how they're helping millions of homeowners avoid foreclosure and stay in their homes, be sure you know this. The bank doesn't want to modify your loan, not in the least bit.

Think about it from the bank's point of view. They agree to eat some past due payments, rework your loan to lower your rate, and then send you on your way. They spend real money doing this modification, both in legal fees and in lost time by their employees. Banks are over burdened, slow moving creatures that have a hard enough time just walking in a straight line, and now you want them to do a front flip and stick the landing?

The bank doesn't want to modify your loan because they know the odds are that it just isn't going to help, and for that claim, they have statistics on their side. According to a study by Barclay's, "current loans receiving rate modifications will experience a 62% redefault rate; while delinquent loans receiving rate modifications will experience an 83% redefault rate." If you're in trouble with your loan, the bank knows that if they don't modify your loan, you default. But they also know that if they do spend time and money modifying the loan, you'll also default. The result is the same to them, but one option requires more energy on their behalf and increased the amount of money they're going to lose off of the troubled homeowner.

You see now why the banks don't want to waste time and money modifying a loan that is statistically doomed even after the modification? In spite of these realities, Obama and friends continue to think this is the answer to our housing crisis. It's no wonder a bunch of academics from Harvard who boast a combined real estate resume roughly the size of the fingernail on my pinky can't figure out how to fix this mess.

The free market is moving towards a resolution, but every bit of Obama intervention, outside of the Mortgage Backed Securities purchases that are keeping mortgage rates artificially low, is only getting in the way of recovery. Let the banks ignore modification attempts, and although it's cruel, it will indeed speed up our housing recovery. Why Obama doesn't understand that is beyond me, and is further proof that the principles guiding this administration are feel good principles that prove an easy sell to a simple minded public, but have little statistical proof to back them up. I believe that's called hot air, but in this case, it's really, really expensive hot air.

Published in Realty Times
Written by David Curry
July 9, 2009

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