Lenders cash in on the success of their housing market manipulation
As rising prices restore collateral backing to bad bubble-era loans, lenders ramp up foreclosure proceedings to get their money back.
Starting in early 2009, lenders placed their faith in the success of loan modifications. Lenders define success differently than underwater homeowners (loanowners): Success to a lender means obtaining a few more payments prior to a short sale or foreclosure, whereas success to a loanowner means maintaining ownership permanently.
Loan modifications were granted ostensibly to “keep people in their homes,” but this was disingenuous spin. It isn’t their home, and it never was. The people obtaining loan modifications borrowed a huge amount of money, often with nothing down, to get their name on title and occupy real estate.
Underwater loan owners have the same claim to real estate a renter does: none. They have no equity. The only thing they own is their loan. The truth of this becomes obvious if you consider what happens to a loanowner at the sale of a home. Rather than walking away with an equity check like a homeowner does, the loanowner walks away with a debt to the lender for the shortfall on the loan they owned, either that, or they obtain a large tax bill from the IRS for the amount forgiven. They obtained nothing for “owning” the house, but they endure serious consequences for owning the loan.
Lenders grant loan modifications while it’s in their best interest to do so, but loan modifications are not an entitlement, and lenders don’t want to make them one. Lenders made loan modifications difficult to obtain because if the process were too easy, everyone would apply for one. Lenders hoped most borrowers would give up and resume making payments, which some did, but many more simply quit making payments and squatted instead.
Once borrowers squatted lenders had a more serious problem: they could either allow the squatting and risk an onslaught of strategic default as other borrowers quit paying to obtain free housing, or they could foreclose and endure a huge loss. In New York, a housing market where most of the head bankers lived, they opted to allow squatting rather than foreclose on delinquent borrowers and resell the foreclosures.
By not foreclosing, the bankers kept property values artificially high in their own neighborhoods, and they prevented their bank from enduring enormous losses. From their perspective it was a win-win. In the meantime, delinquency rates escalated dramatically, and many local borrowers enjoyed the free ride.
Since both loan modification or squatting removes a distressed sale from the MLS, lenders restricted the supply of homes for sale, and by 2012 this policy succeeded as housing inventory dried up, and house prices bottomed.
With prices rising, lenders benefit two ways from both loan modifications and squatting. First, if lenders talk the loanowner into a modification, the lender obtains some cashflow from non-performing loans. Lenders know this is temporary as about 50% of loan modifications fail each year, but some cashflow is better than none. However, more significantly, when prices are rising, when they do finally approve a short sale or foreclose on the property, they will recover more of their original capital than if they were to foreclose today; thus even permitting squatting benefits them in the end.
By Jennifer Gould Keil, October 30, 2015
Foreclosures have spiked a remarkable 433 percent in Brooklyn this year.
From January through September, 453 foreclosure auctions were scheduled, up from 85 in the same period last year, according to RealtyTrac.
A recent one-month comparison shows an even more dramatic percentage rise.
This September, there were 83 scheduled foreclosure auctions — up from 14 in September 2014, a 493 percent increase, according to RealtyTrac.
The spike is counter to a national trend that has seen a drop in foreclosure auctions to a more than nine-year low, added RealtyTrac VP Daren Blomquist.
Ironically, the hot Brooklyn real-estate market is spurring the rise.
“There was a backlog of foreclosures in Brooklyn and they were finally pushed through because people can [now] resell the homes and recoup their losses,” said RealtyTrac exec Ginny Walker.
This should come as no surprise to regular readers here. Back in 2011 I noted that Loan modifications are not an entitlement, banks don’t want to make them one. Then in 2013 I predicted the Loan modification entitlement will be rescinded as prices near the peak, evidence of this above.
The next phase of the process is outlined in a post from 2014, The final resolution of loan modifications will push people out of their homes. The result will be Mortgage and foreclosure crisis 2.0. , and ss I recently noted, The final wave of foreclosures is proceeding briskly.
Lenders loan money to maximize the return on their capital; they aren’t a charity providing lifelong subsidies to borrowers who want to remain in houses they can’t afford. Borrowers need to prepare for their exit because petitioning for continued subsidies will fall on deaf ears.
The lenders won. Their gambit to modify loans and allow squatting until house prices rose enough for them to recover their capital succeeded. Now, they are merely cashing in on their success, loanowners be damned.