Do lenders care about keeping delinquent borrowers in their homes?
Lenders only care about borrowers making payments, not borrowers continuing to live in houses purchased with the lender’s loan money.
Many borrowers and housing advocates suffer the delusion that lenders act out of compassion when borrowers become delinquent. Borrowers and activists believe lenders should concern themselves with the borrower’s unique life circumstances and allow delinquent borrowers to keep living in houses they aren’t paying for out of compassion. Undoubtedly, some bank employees feel compassion for delinquent mortgage squatters, but banks are running for-profit businesses, not non-profit charities; therefore, bank policy must be focused on maximizing revenue and profit rather than providing social services for needy borrowers.
I recently read Ayn Rand’s Atlas Shrugged, Ayn Rand’s manifesto on objectivism. The book relates the story of the court battle, Amalgamated Service Co. v. Mulligan, in which the banker Midas Mulligan was ordered to extend a loan to borrowers he believed would become delinquent because the judge felt extending them the loan was the compassionate thing to do. Rather than start making loans that would bankrupt the bank, Midas Mulligan shut it down. Lenders have a duty to their shareholders and depositors, and letting delinquent borrowers tie up bank capital without providing any return is antithetical to banking operations.
On the other extreme, It’s a Wonderful Life, portrays the actions of Banker George Bailey, who ran his bank as a communist collective where small depositors banded together to provide sufficient capital to make home loans for the betterment of the community. When depositors made a run on his bank, George Bailey made this famous speech:
Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.
It isn’t hard to guess what George Bailey would think of REO-to-rental businesses or too-big-too-fail banks, but I wonder how George would deal with a deadbeat. His collectivist idealism would be a magnet to freeloaders looking for a free ride based on their self-perceived need.
Both the examples above are idealistic extremes of banking. Atlas Shrugged is the conservative ideal of unrestricted free enterprise for personal benefit, and It’s a Wonderful Life is the progressive ideal of collectivist action for the greater good. Out of necessity for financial survival, modern banking functions far closer to the Atlas Shrugged extreme.
A Banker’s compassion must be bought
Borrowers and housing advocates want bankers to allow delinquent mortgage squatters to live in houses they aren’t paying for until the borrower gets on their feet financially, which really means indefinitely. Then, if the borrower is unable to make the contractual payment, these same borrowers and advocates expect bankers to unilaterally amend the terms of the promissory note in favor of the borrower at the expense of the banker and the bank’s investors and bondholders. The banker is supposed to happily absorb this blow out of compassion for borrowers who’ve fallen on hard times. Since so many borrowers were underwater, and since foreclosure would result in a huge loss, bankers played along by offering loan modifications.
Bankers don’t offer loan modifications out of compassion. They may pretend to for public relations benefit, but bankers offer loan modifications in order to get some cashflow out of non-performing loans they can’t foreclose on because the collateral is still worth less than the outstanding balance on the loan. The bank is between a rock and a hard place, and getting something is better than nothing. The obvious next step is for the bank to rescind the loan modification entitlement as prices near the peak. Realistically, the only reason they are modifying those loans now is because foreclosure is more costly.
Regulatory pressures amount to legalized extortion
… “One of the factors causing the foreclosure crisis to sludge along and even to large degree run-in-place, is the amount of misinformation that has been allowed to proliferate throughout the country,” notes Martin Andelman, host of the “Mandelman Matters” program and a keen observer of the industry.
“As time passed and the crisis worsened, absent any factual communications to the contrary, the problems of correlation and causation started to multiply. Georgetown Law professor Adam Levitin and Tara Twoomy, in an effort to explain what was happening to homeowners, published a paper in 2010 titled Mortgage Servicing, that became the gospel for consumer attorneys and then homeowners across the country… and it remains so today. The problem is the paper’s conclusions were wrong.”
The basic thrust of the Levitan Twoomy paper is that mortgage lenders and servicers want to push home owners into foreclosure, gain control over the homes and thereby profit. This fundamental error — that it is good business to push a homeowner into foreclosure – is repeated constantly in the Big Media …
Anybody with even the slightest idea about the world of distressed servicing knows that the law now requires that loan modification is the first order of business when a borrower gets into trouble….
If and only if the borrower is also underwater. Lenders may be legally obligated to consider a loan modification, but the answer will universally be “no” when there is equity and the bank can get it’s money back and loan it to a borrower who will pay in accordance with the promissory note.
If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan.
First is keep the owner in the house.
Second is protect the asset and make sure that maintenance, taxes and insurance are current. And third is to preserve the cash flow of the loan via loan modification, if possible.
Keeping the family in the house and protecting the asset and cash flow, even with a substantial modification, is always better for the note holder, whether that is Uncle Sam or a private investor.
Notice the focus is on protecting cashflow. Compassion for the plight of borrowers is not on the agenda.
You and Martin Andelman simply haven’t a clue about what you are talking about.
I know that Martin does not go to court, and I doubt that you have any practical experience in the real world of foreclosures.
I train lawyers all over the country.
I speak to lawyers all over the country every day.
I go to foreclosure mediation often and I go to court often.
Your theories simply do not match reality.
There is daily and massive evidence in our dealings with the servicers outside of court, in our foreclosure mediation programs and in our court cases, that the servicers could care less about keeping homeowners in their homes. In fact, in a high percentage of cases where homeowners are demonstrably able to afford loan modifications that would benefit investors, the servicers work their hardest to deny those modifications.
The only thing shocking to me about the revelation that servicers could care less about keeping delinquent mortgage squatters in their homes is the idea that someone thought they would care — or even that they should care. Servicers should care about the interests of the investors in the loans they service.
Don’t go blaming the homeowners for this–I am referring to huge numbers of cases where they have either housing counselor assistance or legal assistance, where complete loan modification applications are submitted, and where the servicers, in defiance of the National Mortgage Settlement and now in daily defiance of the new CFPB regulations, fail to review the applications and wrongfully deny them.
Martin Andelman excuses the servicers, claiming that “it is hard” for them to do modifications. They have had more than five years now to do it right. The reality is that they are unwilling to invest in sufficient resources to do it right, because doing so will eat into their profits.
So who is right? Chris Whalen claims it’s in an investor’s best interest to modify the loan, and Thomas Cox says servicers are foreclosing because investors want them to. The real problem is that both of them can be right at the same time because we are very near the dangerous tipping point in favor of foreclosure.
Loan modifications carry a cost: Lenders could loan money to new borrowers at 4.5% in today’s lending environment, so each loan modification where they accept 2% creates an opportunity cost. … The only reason lenders allow borrowers to pay 2% when the going rate is 4.5% is because they would lose more money foreclosing than they would gain extending a new loan; however, once that calculation tips the other way, lenders will stop can kicking, and borrowers will either pay up or get out.
… as appreciation slows down, as lender’s costs go up, as lenders become strong enough to absorb losses, lenders will reach a tipping point where foreclosure makes more sense than can kicking or squatting.
Consumer advocates conveniently forget that in the vast majority of cases, the “victims” of foreclosure abuses, real or imagine, have defaulted on their promise to repay the mortgage. They borrowed money to buy a home and now they are reneging on that solemn promise to repay the debt. Indeed, not content with their clients defaulting on the mortgage, consumer advocates want to further injure the note holder by allowing their clients to live in the house for free, sometimes for years. …
Obviously, reminding people that delinquent mortgage squatters are delinquent doesn’t serve the public relations interests of advocates, so this fact is always conveniently omitted.
The pre-2007 mortgage market was designed to move money around, not to care properly for consumers or service distressed mortgages. The big bank servicing operations were built on the assumption of zero defaults. As a result, the big banks are losing billions of dollars per year on mortgage servicing, one reason they are so desperate to sell these loans. …
Mortgage delinquencies much higher than reported because lenders are selling their non-performing loans. Also, the losses from all this servicing cost is pushing us toward the dangerous tipping point in favor of foreclosure.
Loan modification not only helps the borrower to repair their credit standing, but helps to preserve or restore the cash flow coming to the servicer and the note holder. When the borrower defaults, the servicer is required to pay the property taxes, insurance and in some cases the interest and principal due to the note holder. So a loan modification is always a superior choice vs. a foreclosure. …
Sadly, consumer advocates and many people in the regulatory community think that the many acts of stupidity committed by the TBTF banks are the rule for the entire mortgage industry. If people like Tom Cox and Adam Levitin actually took the time to understand how a compliant special servicer behaves in today’s mortgage market, they might change their tune – but I doubt it.
I doubt it too.