Foreclosures Are Often in Lenders’ Best Interest

An article in this morning’s Washington Post – front page and above the fold – addresses the fact that foreclosures are often in the lenders’ best interest.  The jist of the story is that banks and other lenders have more financial incentive to let borrowers lose their homes than to work out a settlement.

The problem comes because good policy is often at odds with economic reality.  For instance, policymakers like to say that it is a good deal for lenders to work with borrowers on mortgage payments so they can stay in their home.  Researchers and industry experts note however that foreclosing can be more profitable.

Despite the administration’s ambitious efforts to address the mortgage crisis, the gains to be reaped by lenders pose a serious challenge to a significant turn around in this sector of the market.

Let’s look more closely at the three distinct scenarios facing lenders:

  1. Loan modification –  only makes sense for a lender if the borrower can’t sustain payments without it, but will be able to keep up with new, more modest terms.
  2. Borrowers who are likely to fall behind on payments even after a loan modification.  Lenders don’t want to help because waiting to foreclose will be too costly.
  3. Borrowers who can catch up with delinquent payments (although often at great personal sacrifice).  Lenders have no real incentive to help.

In a study released last month by the Federal Reserve Bank of Boston, the analysis found that “lenders lowered monthly payments of only 3 percent of delinquent borrowers, those who had missed at least two payments.  Lenders tried to avoid modifying the loans of borrowers who could ‘self-cure,’ or catch up on their payments without help and those would fall behind again, even after receiving help . . .”

For more on this story, click here.  It’s worth reading.