Why Few Seem To Be Able To Work Out Better Loan Terms

Call it what you will, the borrower bailout/rescue/whatever does not seem to be working. Foreclosures are still on the rise along with defaults and sad stories. And while those numbers go up, the economy continues to worsen.

This is not doing the banks any good, either. Banks lose a ton of money every time they have to foreclose a mortgage. If borrowers could stay in the home, but for a lower payment that will still pay off the house eventually, everybody wins.

So why aren’t lenders doing it?

There are a couple of reasons.

One, loan servicers are the ones who consumers generally communicate with, since they are the ones sending the bills. But loan servicers don’t have any real incentive to refinance, since, like a lot of companies, their income is based on generating fees. They get a portion of the receivables, but every late fee is like a bonus. They love homeowners who are behind, because those homeowners pay those fees for as long as they can. And servicers are also the ones who handle the foreclosures, where they get paid again.

Two, securitization. Loans are not held by one lender. Not for long, anyway. Most mortgage loans are bundled up into a big security. In other words, investors basically buy shares of the bundle of mortgage loans, betting that the value of their share(s) will rise (or fall, if you can short sell securities).

What that means is that there may be hundreds of “owners” of any given mortgage. There is no decision-maker for the borrower to negotiate with, just the legal foreclosure process. So when we blame the “lender,” who are we really blaming? There are potentially thousands of lenders for every loan.

So in the end, the loans just keep going into foreclosure, and it is a rare borrower who gets to rework their mortgage.

Comments

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  1. m4ximusprim3 says:

    American Public: “This sounds bad. We should do something about it!.. Oh, look, a shiny object…”

    and so it continues.

    Also, maybe I’m just being my normal oblivious self, but is samglover new? Feel free to point out that I’m a moron if I’m wrong.

  2. Megladon says:

    Wow, sad, just another reason why this entire mess needs to get sorted out so that it is possible to deal with someone so that people can try to be responsible and keep the house and make payments.

  3. Nytmare says:

    @m4ximusprim3: I’m so sorry the article was info that you already knew. What a disappointing waste of your time.

  4. mac-phisto says:
  5. ManPurse says:

    @nytmare: ummm… okay…

  6. It’s simple. In order to negotiate anything to one’s own advantage, one must hold at least some of the cards. This usually doesn’t apply to those with questionable credit whose credit card accounts are in arrears and/or have large balances. Guess what. Your elected officials sold you out. Enjoy.

  7. broke1 says:

    Sam Glover seems to be very helpful. Even though, he is stating the obvious. Some might not realize that this is exactly the current state of many foreclosures. Many and I might even say most do have an ability to negotiate a payment but are unable to because of the loan servicers unwillingness to even deal with consumers. Many are tricked/forced into a subprime lending situation from the start, thinking, betting or gambling they will be in a better situation in a couple years to refinance to a conventional loan. It is definitely not just happening to the uneducated, poor and/or unscrupulous. I applaud Mr Glover for providing free information to individuals in this situation and also free legal advice. I hope his intentions are pure

  8. Me - now with more humidity says:

    I lost three short sale offers because the specious servicer took too long to make a decision (four months). Now they’re getting the keys back.

  9. humphrmi says:

    Banks are also getting pushed to “kitchen sink” their risk – i.e. write it all off and move on. Once they write off or write down a questionable debt, they no longer have any accounting incentive to work with the borrower.

    @Me: I’ve never heard a good explanation why a servicer takes months to approve a short sale. If I were an investor, I would want any dollars I could get right now, especially if the loan was pre-foreclosure. Yet the servicers blame the investors for the delay. And the buyers of course hold all the cards – whoops! you took too long! That house down the block is now cheaper than yours! Later!

    Sorry, I don’t mean to rub it in. Nobody’s making sane financial decisions these days.

  10. chrylis says:

    @humphrmi: While the banks may no longer have an accounting incentive to negotiate, they do still have a profit incentive. While the pressure or perceived urgency may be much lower, if the bank has written off the debt as bad and then manages to get repayment, they can recapture some of their losses.

  11. sleze69 says:

    If the government was somehow able to force the lowering of fixed mortgage interest rates by the same about that they are dropping the credit card interest rates, these foreclosure problems would go away VERY quickly.

    Sure, the mortgages would be less appealing to buy but the originator would still be making money on the loan.

  12. u1itn0w2day says:

    I have empathy but no sympathy for many of these borrowers even though some of the mortgages they were asked or told to sign shouldn’t have been even offered.

    I was always told ‘money down’ and everything I have read or heard says your mortgage should be no more than 3 times your yearly salary or your yearly salary should be at least 1/3 of your mortgage.

    That being said the house flipping mentality artificially inflated the actual costs of real estate irreguardless of credit.

    Even if you’re a family needing space you can still rent a house so it still comes back to “I want” a house.Problem is the mortgage/banking people “want” a profit as well.

  13. Silversmok3 says:

    The problem is of negotiation. The homeowner needs the home more than the bank needs the mortgage payment,especially if the bank flipped the loan to a a hedge fund and doesn’t even get the payments anymore.

    So, the banks attitude, is why should we help you stay in OUR home, when we barely make any money off of you NOW?
    The worst thing that can happen to a bank that forecloses is gaining a property.
    Meanwhile the homeowner is left without a home, or the ability to even rent a new dwelling due to a ruined credit score.

  14. RobinB says:

    Our small community bank gets 5-10 calls each day from homeowners in
    trouble. Our state’s help hotline gives out our number, but these are
    not loans we originated. Many should have called months ago in order
    for us to help. Others should never have been given the loan to start
    with, and they still have to qualify for the new loan for us to help
    them. We want to help these folks, but find our hands tied in many
    situations. The state programs and FHA Secure programs still have many
    restrictions, and many people just don’t fit the parameters.

    The poster above is correct, a loan amount shouldn’t exceed roughly
    3 times your income. Many folks calling us were given loans at 6-8
    times their income. It’s mind-boggling.

  15. Me - now with more humidity says:

    humphrmi: Yeah. it’s crazy. The holder of the second mortgage on one of the deals agreed — within just two weeks — to accept 1 percent of their note’s value.

    I was actually told by a senior customer “service” rep at a mortgage servicer called Wilshire Credit (Google their reviews for a good laugh), that they actually prefer it when distressed borrowers go into bankruptcy because they “love to f%$k up bankruptcy filings.”

  16. dragonvpm says:

    In my experience, a lot of credit card companies and mortgage companies tend to operate with a bizarre notion of how to make money that more often than not ends up costing them more than it should in the pursuit of every last red cent they can get. Sometimes, greed has a strange way of coming back on companies (and people)

    I tried to negotiate better terms when I was looking to refinance my home loan with my then current mortgage company. They refused to budge on some small (but costly to me) details so I took my business elsewhere. I found a great deal (better than I had been asking for with my mortgage company) that has saved me a bundle.

    Then, my old mortgage company actually bought out my new mortgage so they ended up paying more for business I would have been quite willing to give them in the first place. IMO, they weren’t negotiating in good faith. They figured they had me between a rock and a hard spot so they had no interest in trying to come up with something that would make them some money and not screw me over.

    Unfortunately, what we’re seeing now is that other people who are being treated like that by their mortgage companies are deciding that rather than take, option A or option A they’ll take option B and walk away which ends up costing everyone.

    Unlike most other companies which will often do things like settling lawsuits out of court because they figure it’s cheaper, mortgage companies can’t seem to do the math and see that keeping someone on the hook for 60, 70, 80% of the original deal is better than foreclosing and making pennies on the dollar (just like CC companies that won’t budge on their terms even if that means that people will just stop paying them and they quite possibly won’t make any money).

  17. Me - now with more humidity says:

    Actually, CC companies are doing a lot of negotiations. I know people who were in default on their cards and the companies offered to settle for 30 cents on the dollar reported as paid in full.

  18. dragonvpm says:

    @Me: The key point being people in “default”. I’m talking about someone who sees that they’re having problems and tries to fix the issue before they default.

    Once you default and it goes into collections CC companies and collection agencies will often settle for pennies on the dollar. My point is that they could end up getting a much larger percentage of their money if (for instance) they were willing to do things like adjust the interest rate to something low so that they don’t lose money (e.g. 4-5%) and yet they get paid back in full. They could freeze the card so you couldn’t use it until you paid it off in full, maybe put in restrictions of how often they’ll let you do it (e.g. maybe the 2nd time you do it they will close the account rather than letting you use it again once it’s paid off).

  19. Dragonvpm is actually right; it can be a lot harder for people *not* in default to get any kind of deal. The mindset is, “You’re making your payment; why should we lower it?” …Even though the answer is almost always, “Because I can’t KEEP making it, because [I lost my job / my ARM adjusted / etc.]!”

    My nonprofit helps people attempt to negotiate with their lender/servicer/whatevers, and what’s said in this piece is definitely true. (A lot of the comments are really over-simplistic, though. It’s not true that “the worst thing that happens to the bank is that they gain a property back”, for instance. Nor is it true that the original lender is powerless or unwilling to negotiate — most of the time it’s just nearly impossible to get ahold of them.)

    The more GOOD information comes out about these problems, the happier I am. The Consumerist has done a good enough job lately that I’m recommending that a lot of our clients read it!

  20. barty says:

    @Mary Marsala with Fries: No joke. I tried getting a temporary reprieve on my mortgage while I was unemployed as a precaution and they wouldn’t budge. Yes, I could pay you today, but trying to be responsible and planning for the worst case scenario.

    Common sense seems to have gone down the drain in this current environment. If I was running the bank, knowing good and well that the cost of having to deal with a foreclosure was 2-3 times that of the potential benefit I get from stringing someone out on higher payments for 4-5 more months, I wouldn’t be able to refinance those loans fast enough. As long as they have the ability to pay at the rate offered, then most of them would be stupid financially not to step in for those who didn’t overbuy and/or were speculating on the market.

    I’ve never heard of a bank that likes getting ANY collateral back in a loan. They almost ALWAYS lose money when reselling the property.