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Ron Escobar's Blog

By Ron Escobar, Broker | Agent in 90019
  • Why would the Bank not Modify my Loan? —It DOESN’T make Any Sense!!

    Posted Under: Financing in Los Angeles  |  January 5, 2011 8:30 AM  |  381 views  |  No comments

    I hear it all the time, and frankly it is a legitimate question… why is the bank willing to foreclose on a home and take less money than what they would get if they modify?

    For example:

    Home bought in 2007 for $675,000 and the loan was $500,000.
    Now in 2010 the home is worth $500,000 and the loan balance is $485,000.

    Now if the bank were to foreclose, the sale price is not going to be the $500,000 the home is worth, but less. An investor will probably pay them $400,000 or the bank would end up buying the home themselves at the foreclosure auction for that much, and then putting it on the market for sale… At the end of the day the bank is probably going to recover $385,000 and the home owner would have lost their home and be unable to buy another home for several years because of the Foreclosure on their Credit Record record.

    So why would they not let the home owner stay there and lower the interest rate or modify the payment? Why not let you stay there for $475,000 loan balance at a 2% rate fixed for 5 years? The bank would be ahead and the home owner happy?
    The answer is just as confusing as the problem itself.

    First, it starts with the fact that what you call the Bank is really a Loan Servicer and Not a Bank.
    Second, you do not owe them the money. Instead you owe the money to the “Investor” and the investor could be just about anyone… part of your loan may be owned by your Mutual Fund company or Pension Fund. They get a saying in whether or not they modify the loan and what losses they are going to take. Furthermore, your loan may or may not have Private Mortgage Insurance and they also get a saying. If your loan was pre-packaged by Fannie Mae or Freddie Mac, they may get a saying… If it was owned by a bank that was closed by the Government, like Washington Mutual, then the federal Government may have a saying…

    So imagine all these so called owners, each having a say and a plan with their own rules and regulations, each trying to minimize their losses (because the money has to come from somewhere) and you get a bureaucratic gridlock. It is impossible for them to make a decision that a natural person or entity would make… It is not because the bank (Loan Servicer) employees do not care or want to help. It is not because the government, it is not because it would make sense. It is simply a sad reality and byproduct of the Corporate world we live in. is like the old comedy script by Abbott and Costello Who -is on First and What – is on second…. You may feel like the short stop whose name is -I Don’t Give a Damn!

    That is the reason the bank (Loan Servicer) will not modify your loan, even when it makes sense to do so.

    Loan Modification Comedy

    Loan Modification Comedy

    • First Base: Who
    • Second Base: What
    • Third Base: I Don’t Know
    • Left field: Why
    • Center field: Because
    • Pitcher: Tomorrow
    • Catcher: Today
    • Shortstop: I Don’t Care/I Don’t Give a Darn/I Don’t Give a Damn

 
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