Why can’t we stop the flood of foreclosures? We keep hearing about the failure of the government’s efforts to modify mortgages, and many—this writer included—have questioned the actual intent of such programs. And while the President has talked of saving 9 million homes from foreclosure, the results to date are trivial.
What’s the reason that loan modifications aren’t working? Why are lenders seemingly unwilling to lower the outstanding loan balances in an amount sufficient to allow owners to remain in their homes. The numbers show that lenders will generally lose much more from foreclosure than modification—studies have demonstrated that foreclosures cost many times the amount lost through modification.
But loan modification is the foundation of 2 great fears for lenders, the first of which is the possibility that the homeowner will eventually default regardless of modification. Statistics have shown that as many half of the modified loans ultimately end in foreclosure. And with declining real estate prices, many lenders would prefer to take the “bird in the hand” and sell sooner rather than later.
In my view, however, there is but one reason that lenders are reluctant to lower mortgage balances. They are fearful—and rightfully so—that reducing the loan balances of a significant number of loans will encourage others to seek the same remedy. It’s not a flood of foreclosures they fear, but a flood of additional defaults and requests for modification. Lenders are horrified by the very real prospect that millions of homeowners might suddenly cease their mortgage payments in order to seek a reduction in principle and a more attractive interest rate. A surge such as that would totally undo the banking system.
Why can’t we stop the flood of foreclosures? Because no one with the power to do so is willing to take the risk. The government may talk of saving homeowners, but to do so would wreak havoc in the banking industry, and our lawmakers have already demonstrated their unwillingness to allow that to happen.
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