With the Big Business Bailout for Billions Act of 2008 being debated and cajoled through Congress, the attention has finally been focused back onto the people being hurt most by the financial crisis — homeowners who were taken advantage of by the Federal Reserve’s cheap money po
licies during the housing boom. Instead of just rescuing the banking system from its poor lending decisions, many private individuals on numerous forums online have been discussing various ways to help foreclosure victims that do not involve handing over hundreds of billions of dollars.
What many seem to be describing is essentially one or another variation of a mortgage modification, which is commonly recommended to homeowners as one of the best options to try to save their homes and negotiate an affordable payment with the current lender. Ideally in such situations, the mortgage company would be willing to work with the borrowers to make the mortgage more affordable, keeping them in the home and the bank would keep taking in payments. Typical loan modifications involve lowering the interest rate, extending the term of the loan, or putting the missed payments on the back of the loan to be paid off last.
But there are a few problems with the modification process from the lender’s perspective.
First of all, it costs money to evaluate these foreclosure cases and decide if homeowners qualify for a modification and what kind. Banks do not devote nearly as many resources to loss mitigation as they do to sales of new mortgages, and foreclosure departments are often overworked and understaffed. It is much easier and more profitable for mortgage companies to focus on the next loan to originate, rather than help people who are struggling.
Second, many homeowners who take on any plan to save a home from foreclosure often fail to complete the program and end up back in default in a number of months, if they are able to make even the first payment. Banks are aware of this and have become somewhat cynical about providing a helping hand. This creates a cycle where banks anticipate failure and so offer less than helpful solutions, which homeowners inevitable fail at, which reinforces the belief by lenders that borrowers will not complete a plan designed to help them stop foreclosure.
Next, if the banks kept the interest rates lower or extended the term of the loan, it would make the bonds that have been created out of these mortgages worth less. Banks would have to write down the value of the mortgage securities anyway, just like they have been for the past year, and show that the loans they made were garbage and probably valued inaccurately from the very beginning. So if they help someone in foreclosure with a modification, the banks have to take a loss on paper and dedicate resources to loss mitigation; if they do not help, they still have to take the loss but end up spending much less on help that is not provided.
Finally, many of the government programs that have been offered to homeowners so far specifically involve modifying mortgages for homeowners, such as Hope Now and Project Lifeline. The problem has been that these plans are 100% voluntary for the lenders to participate in, and participation has been less than effective. Banks would rather force homeowners into paying more than they can afford to get back on track with the loan, so that the banks do not have to write down the value of the bonds. Modifications are a bit more difficult to qualify for, but mortgage companies are not required to offer anything at all and will set up borrowers in expensive repayment plans.
Thus, banks have already been given more than enough opportunities to work with homeowners to fix the foreclosure crisis on their own. Thus far, they have squandered each of these opportunities and have instead come to the US Treasury, Congress, and American people for an enormous bailout of their financial problems. If the lenders had worked in good faith with homeowners in trouble, there may be more sympathy for such a rescue plan. But as it stands now, enormous corporations that preyed upon homeowners and left them out to dry when they needed help certainly do not deserve a single cent of taxpayer money.
The problems banks are currently experiencing are of their own creation and would not have occurred if they had been more willing to work with their clients to solve these foreclosures. Lehman Brothers, Merrill Lynch, Bear Stearns, and all the rest have earned nothing for their efforts than failure and for the truth of their financial manipulations to come out in bankruptcy hearings and state and federal investigations. They have certainly not earned the privilege of being nationalized by the American people and then having their immoral inflating of the bubble to be covered up.