Expecting Your Lender to Work with You? Think Again!

Ok, first off I’m neither an attorney nor an accountant.  The following is an overview based on personal experience.  The numbers used are not exact etc.  This is not intended to be an in depth analysis, but an overall look at Foreclosure and why banks would rather foreclose on a home rather than negotiate a work out or modification.

For those of you who are over leveraged, upside down or otherwise having difficulty with your finances and are expecting your lender to work with you - think again.

Lenders are in the business to make money.  That’s what they do.  The only way they’ll consider working with you is if it’s financially to their best interest to do so.  Which, makes sense.

Loan modifications are a joke.  Ask any lender who’s out in the market and they’ll tell you very few of these actually make it to closing.  Those that do, provide temporary relief for 3-12 months and then reinstate the previous terms of the mortgage.

And, some Loan Modification actually result in higher monthly payments!  So, be careful!  Really careful!!!


Another strategy to be careful of, is when the lender agrees to a monthly payment reduction while the loan modification is under review.  The review process can be and more often than not, a lengthy process.  So, the relief the reduced monthly payments offer is very welcome.


But what happens is, after six months of waiting for the good news, you get a letter that says, sorry, but your request for a loan modification has been denied.


The kicker is, they then tell you that because you haven't been making your monthly payments in full you have incurred penalties each month, and oh, the difference between what you were supposed to have paid over the last six months versus what you did pay is due NOW along with the penalties!  What?!

So, why will lenders foreclose when there are so many foreclosures on the market?  It just doesn’t make sense, right?  They foreclose and then turn around and sell the house for half or less than half of what you owed.  Crazy right?

Not so much!  

First of all, if your mortgage was packaged and sold off to investors, your mortgage was essentially paid off already.  The bank got all their money plus some profit already.

Take a home with a $100,000 mortgage, and a current market value of $60,000.  You lose your job, and can’t make the monthly payments.  You can’t sell the place (unless you have $40,000 to bring to closing), and you can’t rent it for an amount sufficient to cover the principal, interest, taxes and insurance (PITI).

You have no choice but to call the bank and see what can be done.  I mean, everybody is telling you, call the lender, given the fragile economic circumstances and legislative pressures being applied, they'll work with you.  

Yes and no.  What they'll do first is send you Obama’s Home Affordable Modification Program (HAMP), package.  There's a ton of information to gather and complete this package.  Income statements, bank statements, tax returns, household costs, assets etc.  They need to gather a ton of information about you to determine whether you qualify for a loan modification.

But, if you’re unemployed, you can kiss that option good bye.  You don't qualify because you have no visible means of paying the monthly obligation.  There’s an old saying that says, "Banks will only loan money to people who don’t need it," or something to that effect.

Which, had they adhered to, we probably wouldn’t be in this mess - or at least not as bad a mess.  But, that’s another topic...

So, let's say you have a $100,000 mortgage on a home worth $60,000.  Rule of thumb says the bank will lose about $20-$30,000 whenever they foreclose (off the loan amount).

Their legal costs of foreclosing such as holding costs, costs of selling that the lender will have to pay out of pocket that can easily get add up to $15,000 on a house that size. 

They’ll be reimburse for about 85% of the original loan because they have the debt insured - most likely by your tax dollars. So, on $100,000 dollar mortgage, they’ll be reimbursed $85,000.  So, there's another $15,000 potential loss.

So, they have $100,000 mortgage and $15,000 additional costs to foreclose, for a total potential loss of $115,000.  $115,000 minus the $85,000 they get reimbursed, puts their loss at $30,000.

All they have to do, to break even is, sell the house for $30,000.

If they foreclose on you and take the house back, they can easily sell that house at a discount for $40,000 and be ahead of the game.

They have the $85,000

$85,000 + $40,000 = $125,000.  Now deduct their loss from the gain and you can see why foreclosure is appealing.  $125,000 - $115,000 = $10,000 they gained by foreclosing.

What if they agree to a short sale?  Again, if the house has a market value of $60,000 and an offer comes in at $54,000 they’re golden!  

$85,000 + $54,000 = $139,000.  Subtract their loss:  $139,000 - $115,000 = $24,000!  Remember, they can sell your house for as little as $30,000 and break even.

Plus, they can hold your feet to the fire for their “loss” - the difference between $100,000 and $54,000, or a $46,000 deficiency judgement.

They may negotiate that with you to pay off that deficiency judgement with reduced monthly payments.  They may even cut you some slack and discount the deficiency judgement to say, $18,000.  Which, most folks will gladly accept to get that $100,000 monkey off their back.

To the bank, that extra $18,000 is just gravy.

Let’s not forget the interest they collected on your mortgage while you were able to make your payments.

Now ask yourself, why would they try to keep you in your house, when they can make more money by giving you the boot?  

Again, let me reiterate, that the numbers I have used are for an example only and will differ with every lender and any scenario.  

The point being is, for the most part, it just doesn’t make financial sense for a lender to work with you.  They will make more money for their shareholders by kicking your butt out.

Why do you think the lenders have done so well all of a sudden, and been able to pay off their government loans?  

They took our tax dollars to bail themselves out, and used those funds to foreclose on taxpayers homes, and resold them at a profit.

Isn’t it great?!  

Nobody is even questioning the lender’s practices!  Well, they’re starting to, but then your legislators are probably going to step in to help protect the lenders, once again...