How Banks Benefited by Doing Bad Loan Modifications

Loan modifications were going back into default at a rate of 50% by the end of 2008, which looked like a disaster at the time. Fitch Ratings has now come out with re-default estimates of 65 to 75% that make the end of 2008 numbers look positively rosy. Banks cannot carry the responsibility for these failures alone as there is plenty of blame to go around, starting with the economy. Still, modifications that fail, especially when done directly with homeowners, provide some benefit and/or relief on the banks’ side of the ledger. What follows is a list of benefits that can accrue to a lender by offering loan modifications that they know are not going to work.Gradual versus immediate and steep losses – Executing a loan modification results in a loan that carries less value for the investor. These losses are recorded when mortgages in the investment pool are “marked to market” to reflect a lower incoming interest payment or a reduction in principle. The less an interest rate is marked down, the less a loan loses value. By stair stepping the reduction in value of the loans investors at least mitigate their write downs by taking them over time. Whether the homeowner can afford the loan is immaterial.Banks get to tell the media that they are doing loan modifications – Financials, think AIG, need as much positive press as they can get their hands on. When Bank America recently said they had done 50,000 loan modifications nobody was asking how many were already in default.Banks get to tell the politicians that they are doing loan modifications – More positive press because the banks are doing what everybody wants them to do. “We are no longer intentionally burying borrowers in properties we knew they couldn’t afford. We are helping them to stay in their homes.Re-defaults allow the banks to go back to Congress, say the government plan isn’t working, and demand more bail-out money – Enough said.It would obviously be better for everyone if all loan modifications worked out, real estate prices stabilized, and they all lived happily ever after. Unfortunately, we’re presently not in that kind of environment. What we are in is an “every man for him” situation where the casualties will be counted later. Homeowners would be well-served to remember that, especially if they’re thinking of going it alone for their loan modification. Visit us at 800debtsettle website.