Do the banks actually prefer foreclosures?

Question

The looming housing crisis acutally seems fairly simple to forestall or fix. It seems to me that anything is better than a default, right? When the mortgage holder defaults, the lender gets nothing. Therefore, if there were to be a massive conversion of all these two year ARMs to reasonable fixed rate mortgages, the potential crisis could be wholly averted.

But this isn't happening. This leads me to believe that the banks actually prefer foreclosure and firesale which typically results in another mortgage. I think the problem may be that the mortgages are no longer held by the banks. They have been collateralized and sold as investment vehicles. So they bank is not left holding the worthless mortgage, rather, the CDO investor is left holding the worthless mortgage. Therefore, the bank doesn't really give a sht. But in this scenario, shouldn't the defaulted house actually belong to the investor rather than the bank? Can anyone comment intelligently on this?

Answer 1

Like just about every one else in the world, banks and legitimate lenders "want to have their cake and eat it, too."

One of the few drawbacks: Banks and legitimate lenders HATE foreclosures!
Why? This puts the properties "on the books". They become liabilities for the banks and legitimate lenders. Those properties have to be boarded-up and properly inspected and managed. In the warmer weather, the grass has to be cut. In colder weather, snow and ice have to be removed from steps and sidewalks.

Taxes, trash and sewer have to paid - year 'round. Management fees [including association fees] and inspections are on-going.

When the properties need repairs, usually those repairs are in the thousands of dollars! This means broken water heaters - the water goes into someone else's property and damages their property, too.
Leaky roofs; "squatters", etc.

AND probably THE BIGGEST headache: when a property is on the books, its a liability. It takes away from the lending power of the bank or lending institution which owns that property.

Thanks for asking your Q! I enjoyed answering it!

VTY,
Ron Berue
Yes, that is my real last name!

Answer 2

Well the bundled funds (CDO's) need to meet a criteria, lets say they need to meet the requirements for (x) amount of time, if the default rate eats up the earning (interest received) is less than the agreed amount the the original lender needs to buy back FORECLOSED property it becomes REO. Lenders are unable to take part in refinancing due to the fact they no longer own the mortgage but with the criteria they are forced to buyback the mortgage/property only after Foreclosure.

With all of the standing inventory, residential real estate isn't selling for asking or what's owed. Just by having the properties the lender are having to pay COSTS (property tax/mello-roos, utilities, Association, security, real estate agent). While no one is making the interest payments plus having to pay the extra COSTS. The lenders are taking a large hit on profits. Forcing the bank/lenders to have large WRITE-DOWNS. So all the talk now are the large losses. Stock market the banks/lenders are being hit hard!!!

I hope this was helpful and answered your question.

Answer 3

The situation is complex. The mortgages themselves have not been sold off, but monies have been borrowed by the lenders at interest rates which are tied to the terms of these mortgages. Hence, the money investors expect that interest rates on these mortgages will rise and be paid. That is the basis upon which the monies were borrowed. If the lender adjusts the mortgage to a fixed rate long term, the monies which were borrowed would be too costly to fund the property at the new rate.

Hence, the foreclosures.

Answer 4

Yes. As a real estate agent I see this every day. Banks DO prefer foreclosures for several reasons and they DO get something out of it.

The first and biggest reason a bank or investor would prefer foreclosure is Mortgage Insurance. Banks are insured for the value of their mortgage investment. If they foreclose, they get their money back. But if they do a short sale or keep trying to deal with a difficult borrower, they won't get nearly as much money.

And if investors (or investment corporations) do buy and service the loan, they do own the house in the event of foreclosure.

Answer 5

While your logic SEEMS sound on the surface of it, most lenders are "driving so close to the edge of the road" (because of healthy competition) that they are far better off if people keep their mortgages. To recover their losses they must resell foreclosed property.

My feeling is that greedy lenders and equally greedy consumers (who blindly accepted a scenario that could only possibly work if the sun was shining every day for the next thirty years!) are equally responsible for the "crisis"....may they BOTH learn a valuable lesson!

Answer 6

If it was really just a bunch of "two year ARMs" that needed to be refinanced that would be one thing. That is not the case. There were a lot of people that chose to negatively amortize their property, for whatever reason. Also a lot of people took loans that they couldn't really afford.
That is why we have the problem we do.
The short answer, no banks do not prefer to be stuck with foreclosures.

Answer 7

If the bank just simply allowed anyone that wanted to, to re-negotiate their mortgage...then what kind of incentive does everyone have to pay?

That is why they won't negotiate....because you lose on one, but gain on the others.

Banks also BUDGET for a certain number of foreclosures.