Foreclosure Insanity Reaches New Heights
Sep 24th, 2009 | 18 responses
From time to time in my work I come across a new level of bizarre behavior on the part of lenders. I have previously written about how it never made sense to me that banks with mortgages or credit card companies would not work with their customers to try and work something out. It always seemed to be more logical for the bank/credit card company to get a deal which would give them some money rather than none.
But for many years that wasn’t even a real option for my clients. I remember bluntly telling the lenders that if they did not do something to help my clients that they’d have no choice but to do a bankruptcy and more often than not the response was basically ‘go ahead and do it’.
As the economy got worse and the housing market tumbled, some banks started to make some meager moves towards working things out but more often than not they wouldn’t do anything. At the same time the banks were finding that once they foreclosed on houses that they were suddenly liable for maintaining the property and that local governments were getting quite serious about enforcing those responsibilities.
The result was a pretty heavy burden to the banks and one of the solutions they arrived at was to tell the former homeowners to remain in the house, thus relieving the bank of a burden (IE the person in the house would keep things in good condition). I’ve had a number of clients tell me about how they or their friends had spend two or three or six months in a property before being told to get out, and this was rent free.
Recently however I heard an even more bizarre turn on this scenario. A homeowner was in trouble, could not afford their mortgage anymore and so they tried to work with the bank. The bank refused to give ground and so eventually they moved to foreclose. But they did not tell the homeowner to leave, and in fact allowed him to remain in the house for about eight months.
The next step though was completely unexpected. The bank actually came to the homeowner and asked them if they wanted to BUY THE HOUSE BACK. They offered to sell them the property for about half of what the foreclosure amount had been and helped them to secure the loan.
So this person was foreclosed on but never left the house and now they have a mortgage payment that is about half of what the old payment was.
I can see where it was a reasonable deal from the bank’s perspective. Rather than renting the property they now passed all responsibility to the new owner and they didn’t have to go through the costs and time of putting up for sale and paying a realtor.
But the obvious question is why didn’t they simply start at the beginning and modify the original mortgage ? That would have saved them the cost of the foreclosure and any costs of redoing the loan, etc.
I would like to think that the banks are getting smarter about things but I am starting to suspect that this may just be the first of many such sales.
18 Responses to “Foreclosure Insanity Reaches New Heights”
[...] News Sources wrote an interesting post today onHere’s a quick excerptFrom time to time in my work I come across a new level of bizarre behavior on the part of lenders. I have previously written about how it never made sense to me that banks with mortgages or credit card companies would not work with their customers to try and work something out. It always seemed to be more logical for the bank/credit card company to get a deal which would give them some money rather than none. But for many years that wasn’t even a real option for my clients. I remember bluntly [...]
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Its the obvious question and I don't have the knowledge required to give a factual answer, but I will make a guess. Perhaps there is some legal requirement involved that makes the foreclosure mandatory to achieve a better result for the bank. Then again, perhaps its just idiocy.
[...] Insanity, Lenders, Money, Mortgages, New Heights, New News, News Sources, Real Option News Sources wrote an interesting post today onHere’s a quick excerptFrom time to time in my work I come [...]
Well, it's pretty schizophrenic in the banking world right now. Friends just had their mortgage cut 45%, including a write off of principal. Meanwhile, I'm being offered a stacked four-loan package to cash out at 90% LTV on two houses…without cross-collateralizing. “Who's on first?”
“But the obvious question is why didn’t they simply start at the beginning and modify the original mortgage ?”
Maybe if your friend in his house were to go to the bank in today's market instead of the 8-months-ago market (or with the 8-months-ago set of bank policies), they would have simply modified the original loan.
I have a theory…
Remember most banks don't actually have the loans on their books, but have packaged and sold them off. This means that mods are very difficult most of the time as it involves the consent of many parties, most of whom prefer foreclosures.
Now this is pure speculation, but it's possible that they foreclosed in order to avoid that but then offered to sell it back so they wouldn't be hit with upkeep fees.
I can't seem to scrounge anything up on Google, but I'm pretty sure Mikkel is right. And it's not even that the many parties are eager to foreclose. The problem is identifying all the parties whose consent is required.
And I actually think the solution described by Patrick at the end–foreclosing on the owner and then selling the foreclosed house right back to the same owner at a more sensible price–is a stroke of genius, not madness.
The other question is what did the foreclosure and sell back at a much cheaper price do to the book value of all of their neighborhoods house. The problem with the lowering of house values is that all of the responsible people take a huge hit and get nothing out of it.
Damn, SD. I actually hit the “Like” button on one of your comments. Don't worry, I'll get over it.
Hey, I've got an idea! It's pretty radical, but hey, these are extreme times. Why not make the banks keep and service their own loans instead of selling them off? That way, there's no other parties to consult when changes need to be made, less paperwork and redundancy when the loan originates, and an incentive on the bank's part to make responsible loans. It would also eliminate the derivative markets that have so problematic lately. I know it sounds crazy, but it still just might work.
Doesn't having foreclosures in a neighborhood also lower the book values there?
Are you insane? Then banks would be forced to live on a measly 3-4% spread on 10x leverage, rather than being able to bundle it and charge origination fees and leverage it 30x. That would surely be the end of the financial system.
“That would surely be the end of the financial system.”
End the current financial system . . .
'still trying to figure out the downside. . . .
“they wouldn't be hit with upkeep fees”
Property taxes (which many a government nowadays might actually raise, believe it or not) –
– and liability issues, including for injuries to squatters or from crimes committed in abandoned homes. So far, no lawsuits I've heard of demanding damages from banks due to lowered property values.
Related (scams and overdue demolition, etc.):
http://metrotimes.com/archives/story.asp?id=13791
http://metrotimes.com/news/story.asp?id=14037
http://metrotimes.com/news/story.asp?id=14351
“Damn, SD. I actually hit the “Like” button on one of your comments. Don't worry, I'll get over it.”
So did I! If hell hasn't frozen over, it's at least seeing a good frost!
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