Catch 22
It seems reasonably logical that a bank would work with a homeowner facing foreclosure right? So why don’t more loan modifications get approved?
I regularly hear homeowners repeat this old adage “well the bank doesn’t want another house on their books so…”
But this is one of those maxims that’s both true and false at the same time.
How?
Well I’m really having to fight my urge to toss in a shameless Schrodinger’s Cat reference here, but only physics geeks like me would get it…so ill use a better known example to illustrate.
Its like how in Action movies the ‘good guys’ always say that they wont negotiate with Terrorists. In this example, a homeowner thinking this way is using the logic that they have the upper hand because the bank does not want to go through with a foreclosure since it results in a financial loss for them.
The reality is, yeah they don’t want to take your house but they will.
In this sense the bank is using Keanue Reeves logic from the movie Speed when he says to “Shoot the Hostage”. If you were to shoot a terrorists hostage, they lose their only source of leverage. Not that I necessarily agree with it, but from a logical stand point you could argue that it serves the greater good. Save many, lose one.
Now, you might think I’m getting off topic, but I’ve always wanted to be in a court room and say to the Judge “Just follow me on this one your honor, I promise I’m going somewhere with this” So, just indulge me here a second.
The reasoning behind why we don’t negotiate with terrorists, is so that we take away their leverage, or at least we hope to discourage them from trying to use it again in the future. In this way we are actually saying “while horrifying, we are willing to lose a few for the greater good of all”
Now, to come full circle with this example, Banks know that if they were to begin wholesale negotiating with the public the incentive to continue making your payments would disappear in many peoples eyes. I’ve seen it first hand… I had a guy call me asking about doing a loan modification. He had perfect credit, perfect payment history but was unhappy with his 5.75% rate (WHAT). So he was contemplating ceasing to make payments so that he could try and strong arm his lender into dropping his rate down to “something in the 3 or 4 percent range”.
Aside from the fact that this is a stupid plan, as the bank would look at your ability to pay and say no, leaving you with some missed payments to catch up on and damaged credit its also exactly why banks are so reluctant to work with people who are legitimately in trouble and need the help. They are worried that no one will want to make their payments and will use the pain involved in going through a foreclosure as leverage to try and negotiate with the bank. So the banks shoot the hostage. Thus very few modifications get approved.
More often than not, what you will get offered at the very beginning of any discussions with your lender is whats called either a repayment plan or a Special Forbearance. These can take many forms and the numbers can be set up any number of ways, but this is the most common boiler plate version:
- 50% of the arrears (The money you are behind) as an upfront payment
- 50% of the arrears paid back in equal installments over a period of time ranging from 6-24 months
Its no surprise that these plans fail more often than they work. It doesn’t take a rocket scientist to figure out that someone who couldn’t make their payment as is, won’t be able to make a higher payment let alone write a check for half of what they are behind.
It’s setting people up to fail, and the failure rates are staggering to say the least. Its closer to 100% than it is to 50%.
However, there is hope. A plan can be set up to not only help someone save their home from foreclosure, but actually come out of the experience better off financially than when they fell behind. This is something that everyone should know about whether they are already in foreclosure, or simply face the prospect of it sometime in the future. I’ve always said that I could do so much more if people contacted me before they actually fell behind.
Finally, its worth noting that it doesn’t hurt to have some leverage when you go in to negotiate. I work with a Law Firm that does a Forensic Audit on mortgages to look for violations that would cause the lender to have some liability. Its relatively inexpensive and can really tip the scales back in your favor, or at the very least even them out.
More on this at a later time though, as this is not the intent of the post.
If you are looking for more information on whether you should or can do a loan modification, feel free to email me or shoot me a call and I’d be happy to discuss your situation with you further and give you recommendations as to what your different options are.
