One thing investors all know is the golden rule of mortgage loans: a loan that pays is worth more than one that doesn’t pay. The ways that a loan can pay are easy to list:
- The borrower makes scheduled loan payments
- The borrower defaults and enters into a loan modification
- The borrower defaults and finds a buyer with a deal that is acceptable
- The borrower defaults and the loan is foreclosed (or a deed is given to speed past foreclosure) and the property sold to repay the investor
People ask me all the time when I think the securitization market will come back. It will happen the morning after an announcement is made that the system is ready to recognize that the agreement that compels investors to make loans to borrowers has two sides, and the investor’s side, which says that the investor will be repaid for the money it loaned, also counts.
Foreclosures are expensive, but the real expense is the hardship they bring, to the people involved, and to the legal and servicing systems. They are to be avoided if there is another way to get a loan to paying status.
Modifications are an important solution that intends to keep people in their homes with the expectation that they are experiencing a temporary setback, but with the equally important expectation that these people will ultimately be able and willing to repay their loans. A modification can also accommodate a permanent change in a borrower’s circumstances, but the agreement remains: the investor is willing to continue to finance the borrower living in the home because there is a way for the borrower to make good on his or her promise to repay the modified loan.
Modifications are especially important in a terrible economy where people have lost their jobs and spent their savings to survive. But, ultimately, if someone can’t repay a loan, then the home needs to be foreclosed and sold. That’s the only way the investor, who provided the money for the borrower to buy the home in the first place, will ever get repaid. And if the investor doesn’t get repaid, the investor won’t put money in loans again. And that means that Americans who want to buy homes, and who need to sell homes, won’t be able to, because nobody will be able to get a loan.
Comments
Hello Sue, My name is David
Hello Sue,
My name is David and I'm going to be editing your piece for the Denver Chamber of Commerce Ceremony. Anyway, I was going through the footage of you and Diana, your story fascinated me (despite the fact that I'm a pea-brain when it comes to financial matters), I looked up your company's website and found this blog.
What struck me about this short post though, is your comments of loan modification. One of the problems I see with the "corporatizing" of society is that humans become account numbers. We seem to have lost sight of humanity to some extent (I'm speaking in very general terms, by the way). Too many times when you call customer service for a company there's usually not much the person on the other end can do for you. The representative has a book of rules to go by and even if you ask for a "manager" they can generally do no better. It's become a faceless society.
All that said, even my feable financial mind could see that a mountain of foreclosures was not going to do anyone any good. It blows my mind that someone at the top of these large banks wouldn't say, "OK... change of strategy, instead of taking the houses... let's work out alternate payment plans!" Because bringing in SOME money has got to be better than bringing in NO money. It seems to me the whole catastrophe could have been averted if mortgages where not viewed as inflexible account numbers, but humans who were not WANTING to default on their loans.
You mentioned the TARP funds. That was the money to bail the banks out, right? (If I'm wrong, please forgive. As I said, I'm way over my head here. Heh.) Anyway, even Jon Stewart had a great idea on the bailouts (at least I think he did). He said, why not give that billions of dollars to the the people INSTEAD of the banks... that way, they pay the banks.. the banks have money flowing in... (and 1/4 of it doesn't go into the bankers' pockets as "bonus money"). Wouldn't that make everything soluable again?
OK.. I've rambled far more than I intended to do. I just wanted to say that I find it refreshing to find someone in the mortgage industry advocating helping people (loan modification) as opposed to snagging up all of the houses. And this coming from a guy who rents.
Have a great day/evening!
david
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