Whay aren't banks approving more home loans on foreclosures?

Question

With the foreclosure rate at an all time high. Especially in California. Why aren't the banks being more helpful to get these homes sold? I realize they have been burned by the foreclosure. It was their deceptive tactics that got them there in the first place. I would think they would lower rates, lower prices %100 financing and approve loans for people with good credit. Instead of accepting customers with excellent credit. There are 2 homes on my street that have been vacate for a year. Is this what they bank want? They are already out money. Leaving these homes vacate isn't putting money in their pockets either. What gives?

Answer 1

Approving all those loans got them in trouble in the first place. If banks just approved more people for home loans on ANYTHING, how many people do you think would really buy a foreclosure? If they can afford a $180K home and are looking at two homes--a foreclosure that is $100K and in need of a lot of TLC or a newer home that is $175K and doesn't need that much work, which do you think they will chose?

The vacant homes have nothing to do with banks and everything to do with the market. You seem to be forgetting that while banks can approve loans, it's the costumers, the people who get the mortgage who abuse it. They get mortgages beyond their means. And the vacant homes on your street are probably due to people moving or downsizing, not just foreclose rates.

Answer 2

I was reading an article and it said that the banks do not want to just dump properties on the market because it could cause house prices to spiral down. The lenders have to worry about the effect of panic selling on not only the two houses on your street, but the thousands they own around the country. Eventually they will sell, lower prices, but I too am suprised at the price stickiness in the market.
Also, the whole mortgage financing industry is changing every week. It really is amazing if you know what is going on, I have never seen anything like it. A lot of those lenders that own those foreclosed houses are out of business, like New Century. It is chaos out there, businesses closing, lawsuits, new legislation, corporate bankruptcies, billions and billions of dollars in losses, mass firings, down sizing, no one knows what the hell is going on.

Answer 3

The banks have already been burned by giving loans to 'good people' instead of 'excellent credit'. Do you really think they want to go through the same thing all over AGAIN?

The banks are not going to lower rates unless THEIR costs for money are reduced. Thus far, that has not occurred.

Answer 4

I will say that it is never in the best interest for a bank to foreclose on anyone. I know all lenders are doing everything possible to keep people from going into foreclosure. They are making modifications and extended payment plans. I know you think that the lenders don't want to make loans; believe me they do but right now is a very scary time to lend anyone money. The lender wants to get rid of the property; they loose money on it everyday that goes by and the house just sits there.

I am not sure how informed you are on what and how this "credit crunch" is working out but its not easy to just say I am going to lend money. I will briefly explain it for anyone else that might read this...

When a bank gives out a loan; it lends out with its own capital, but what the banks do after you have your loan is they sell the debt to an investor. This is what they call secondary market. Most banks will retain servicing of your loan; so you wouldn't even know that your loan has been sold to an investor. What this means is that the investor is now responsible for that debt if it defaults; they are the ones that will be out the money. These loans are usually bought several thousands at a time; in some cases with the big lenders several hundred thousand loans at a time. These loans are put into categories; basically a scoring system that tells the investor how good the debt is. For example, a 30 year fixed loan for 200k on a borrower that provided full income documentation and had good credit, would be considered very low risk debt. These loans have a very low rate of return; which means that are not as profitable but are the safest to hold in your portfolio. Fannie Mae is the biggest holder of these safe loans; since they are restricted by law on what loans they can buy. On the other hand the loans that have the highest rates and the highest profit margins are the sub prime debt; since these customers are paying incredibly high rates for their loans. The amount of money that the investor will make on their investment is very high; which make them very attractive to buy. But, they're risky and that’s why you hear so much fuss on the sub prime mortgages.

Now that the values started to drop and the rates started to go up; people are giving up their houses because they simply can't afford them or don't want to pay on a property that is worth less then what they owe on it. Because so much debt is going into default and the loans that were sold were rated too highly or as safer debt then it really was the investors are not buying any new debt. So when they say credit crunch they're referring to the investors; if the investors won't buy the debt from the lenders then the lenders will run out of capital and can't give out anymore loans. This is why so many of the smaller mortgage companies have closed their doors; they just simply ran out of money. All of these loans that the investors were holding also have a clause in them that state that the lender has to purchase back the loans if they feel that they were sold bad loans or loans that were disclosed to be of better quality. So this is further drying up the money that the lenders can lend.

I am sure you heard in the news lately that Countrywide was getting credit lines and borrowing money from other banks to keep operating. Until the investors start to buy the debt again; the banks have to limit and restrict who they can lend too. All lenders have lowered the amount of loan they will give; they require higher ficos and much lower LTV's (loan to value) on the property.

Lenders got very eager to lend money and in some cases, they gave loans to people that really had not reason to be in that loan. But, the money that everyone was making was too good to pass up; you can't blame a business for wanting to give as high as a return to its stock holders as possible. What you can blame them for is for not having a better hold on their underwriting and policies. They got too greedy and now are all paying the consequences.

It will take sometime for the dust to settle and for the panic to pass; once that does the investors will slowly but surely start buying the debt again. The first loans they will buy will be the safe debt; which is the only kind of loans that the lenders are giving out right now. They want to only do these types of loans so that when the investors start to buy loans; then they will be able to sell these loans quickly and get their money back.

I know I made this way too long; but I think it’s important for everyone to have at least a small understanding on what is going on in the economy and how this is affecting everyone. Even if you don't own a home; this is still going to and is affecting you.