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Are Banks Only In It For the Money?

With interest rates so low right now, the easy money isn't that easy anymore for big banks. Most banks are finding other ways to make money rather than just simply by lending money out to people trying to buy houses or investment properties.

Gone are the days of the 3-6-3 rule. You know, there was a time when bankers pay 3% interest on depositors' accounts, lend the depositors money at 6% interest and then be at the golf course at 3pm. These days banks have gotten quite a bit more creative and hurt a lot of customers in the process.

Are banks committing schadenfreude? Schadenfreude, according to means satisfaction or pleasure felt at someone else's misfortune.

So what does this have to do with banks? We know that banks turn over accounts to loan servicers who determine whether a loan can/should be modified, or a short sale approved. We know that these processes are challenging since there are no guarantees to the property owners who are looking for alternatives and are desperately trying to avoid foreclosures. Report

The question is prompted by the October 2009 report by on: "Why Servicers Foreclose when They Should Modify & Other Puzzles of Servicer Behavior"

News Flash

Many news outlets pounced on this report. But is it the report reliable?

Shock! Lenders make more money on foreclosures than short sales!? This was asked in ActiveRain, a network of professionals with an interest in real estate.

And a petition was quickly drafted and is now circulated for homeowners to tell congress to “an immediate halt to all foreclosures until new, mandatory guidelines are established and that these guidelines be overseen by a new Consumer Protection Agency…”

Predictably, the response was mixed. Many realtors and brokers don’t buy it – or perhaps don’t WANT to buy it.

Loan Modification or Short Sale?

Distressed property owners who want to keep their homes have been advised to do a loan modification which is when the lender agrees to change one or more terms of the mortgagor’s loan. For example, a modification may result in lower payments albeit over a longer period of time.

But when a loan modification is not approved, the owners then attempt a short sale when a property is listed for sale for less than what the owner owes on the property.

Short sales cause angst among the realtors. As laborious as a short sale is, many have successfully closed short sales transactions. But there are also short sales that were rejected and ended up as foreclosures.

For example:

A brother and his sister purchased a home for their family for $600k in 2006. When they found it difficult to make the payments, they tried to get their loans modified and were turned down.

  • They enlisted a realtor who listed the property as a short sale at $525K and received an offer of $520K.
  • The first lender, Downey Savings, refused to do a short sale and foreclosed on the property for $375K.
  • They promptly listed it as a bank-owned property for – guess what --- $525. Several price reductions later, it finally sold for $407K after 11 months, or $113K LESS than what the short sale buyer was willing to pay for it!

Hearing that banks/lenders make more money on foreclosures than they do on loan modifications stirred the cauldron. Can this be true? Does this explain why lenders are so difficult to work with and so slow to respond to requests for approval of short sale?

Perusing the report, one finds on page 18 that:

  • "Servicers’ dependence on fees may also partly explain their reluctance to enter into short sales. In a short sale, the borrower typically bears the cost of arranging the sale, thus depriving the servicer and its affiliates of the fees they could charge for default management, including selling the property.
  • Only if the servicer’s financing costs outweigh the foreclosure fees charged and a short sale is significantly faster than a foreclosure, will a servicer profit by agreeing to a short sale over a foreclosure.
  • As between a short sale and a foreclosure, the servicer’s only incentive to favor the short sale, are payments by the investor for performing a short sale. Only if those payments are larger than what the servicer expects to squeeze out in fees from the borrower and default management fees from the REO sale proceeds will the servicer’s scales tilt towards a short sale.”

Are banks only in it for the money? What do YOU think? It sure seems that way these days. Instead, banks should be looking to gain customers for the long term, work with them to keep their homes and help them avoid foreclosures.

After all, a foreclosure only hurts not just the bank and the home owner but the entire neighborhood. Since a foreclosure brings down the value of homes next to it.

Pacita Dimacali - e-PRO, SRES, CDPE, MBA East Bay, North CA real estate. Serving Alameda and Contra Costa Counties. Helping clients with their real estate needs. Experienced and seasoned short sale specialist. Call for exceptional real estate service and results! Office phone: (510) 748-1148

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