Why Banks Don't Actually Want to Foreclose on Your House
Written by James Chan   


“The last thing the lender wants is your house.”- Jim Svinth, chief economist for LendingTree.com


Wait, aren’t banks evil vultures looking to swoop in, snatch away your house, and laugh while you drive your U-Haul truck away from what is now your former home? Well, not quite.

While housing prices were rising, maybe. But now that foreclosures number in the millions and the supply of houses far outstrip demand, the tables are turned so that banks are desperate for you to make your payments on time.

When times were good during the housing boom, rising house prices meant that foreclosures were rare. Say person A buys a house for $300,000. Three years later, A is no longer able to keep up with mortgage payments. However, since the house price has risen to $500,000, A can easily refinance, meaning that he takes out a new $500,000 mortgage to pay for his or her $300,000 one - with $200,000 (minus fees) left over in equity! The only foreclosures that occurred in the housing boom occurred in the extremely rare cases where house prices were dropping.

Now that the housing bubble has burst, however, dramatic drops in house prices started becoming the norm, with disastrous consequences. Using another example, person B buys a house during the housing bubble for $300,000. Three years later, B is no longer able to keep up with mortgage payments. However, his house value has now dropped to $200,000, meaning that even if he or she took out a new mortgage at that amount, it would be insufficient to cover the existing mortgage. In fact, the amount B still owes on her, around $270,000, is more than the house is worth- B is now “underwater” on the mortgage. Therefore, B decides to default on her mortgage, leaving the $270,000 unpaid. The bank forecloses upon the mortgage, but is only able to sell it for $150,000 in a mortgage auction for a $120,000 loss- assuming that the bank is able to sell the house despite the glut in housing supply.

Now multiply that $120,000 by about 1 million - the amount of foreclosures in the third quarter of 2009- and you can see why banks would prefer that you pay your mortgages and keep their income stream steady.

What does this mean for you? If the banks haven’t securitized and sold off your mortgage to investors yet, they just might be more than willing to renegotiate the terms of your mortgage with you, rather than take the heavy loss of foreclosure. If you are looking at trouble, now is as good a time as ever to ask for a renegotiation of your mortgage loan.



 
Last Updated on Wednesday, 22 December 2010 05:06