Home Foreclosures Better Financially than Mortgage Loan Modifications

Government initiatives to stem the country’s mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded.   In the past risk assessors and policymakers had said it’s best for lenders to meet the borrowers half way with a reduction on their mortgage payments in an effort to keep them in their property. But, according to researchers and industry experts, foreclosing can be more profitable.   The problem is that loan modifications is profitable to banks for only one set of distressed borrowers, while home loan lenders are actually dealing with three very different types. Loan modification plans make economic sense for a bank or other lender only if the borrower can’t sustain payments without it yet will be able to keep up with new, more modest terms.

Another round of foreclosures are forecasted for those who are likely to fall behind on their home loan payments again even after receiving a loan workout and are likely to lose their homes one way or another. Lenders don’t want to help these borrowers because waiting to foreclose can be costly.  FHA has already added a new mortgage loan modification alternative to the traditional FHA refinancing, for borrowers whose mortgages are greater than the value of their property.  “The industry and policymakers have been grappling with that.”   The effort to understand the dynamics of the mortgage industry comes as the Obama administration is begging banks and lending institutions to provide additional mortgage refinancing to help distressed borrowers under its Making Home Affordable plan, which gives lenders subsidies to lower the payments for distressed borrowers. Read the complete article at Foreclosures May be Better than Loan Modifications for Mortgage Lenders.