Are banks declining loan mods and short sales because they make more fees on foreclosures?

The New York Times today reported that large mortgage lenders are restarting their foreclosures after some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound.”

But the Times noted that: “hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.”

The Times notes that “Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.”

As a aside note on the operational risk of the foreclosure systems the Times specifically saw the Bank of America’s system operating; “The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.” The Bank of America declined to comment on the systems problems.

While the LA Times reports that Ben Bernanke has stated the the regulators “are looking intensively at the firms’ policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures.” A hopeful sign that post hoc some responsibility may be apportioned to misbehaving firms.

3 comments to Are banks declining loan mods and short sales because they make more fees on foreclosures?

  • […] davidpetraitis, on November 19th, 2010 So what I postulated in an earlier post, that the banks have positive incentives to foreclose and no to modify loans has now been said in […]

  • […] gate: here come the class action suits By davidpetraitis, on November 9th, 2010 Earlier I had written on the fact that banks may be foreclosing in a manner which will cause problems down […]

  • davidpetraitis

    Paul Krugman also wrote about this today in a blogpost Shadows And Fog.

    My comment to his blog post was (slightly edited):

    There are three incentives (At least) working against homeowners here:

    1. Bank balance sheet protection favors extend and pretend – mark to make believe,

    2. Servicers get fees from foreclosures much like points from the selling side of the mortgage(which cover their costs and generate profits) not from a cramdown or short sale,

    3. Under foreclosure the security owners can ask the bond insurer to pony up.

    The Obama administration still has the reins in hand and the money to change these incentives which favor the banks to incentives which favor strapped homeowners (and avoids fraud). The question which Paul raises and no one seems to answer it: Why doesn’t the administration DO anything?

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