Monday, April 21, 2008

Why Lenders Aren't "In To" Fixing Foreclosures

From Inman News, I got a eblast news update that gave me a little more insight into why lenders maybe aren't so eager to modify loan terms for homeowners facing the possibility of foreclosure.

"On mortgages carrying mortgage insurance that go to foreclosure, investors are protected up to the maximum coverage of the policy, which is usually enough to cover all or most of the loss. This discourages modifications. Why do a modification for $15,000 if the $40,000 foreclosure cost is going to be paid by the mortgage insurer?"  So says Jack Guttentag, professor emeritus of finance at The Wharton School at the University of Pennsylvania. (I found Jack's comments at and I think the site requires a free registration to view the article)

Unlike my last post proposing a "fix" for the foreclosure mess, I've got no advice or ideas on this one. I assume it's the investors who bought the loans from the original lender who are getting payouts from the insurance funds. The bulk of today's foreclosures are loans carrying private mortgage insurance, since many of them were exotic 80/20 and 80/15/5 loans which left homeowners with little or no equity in the property. Since the news is filled with stories of big banks announcing big losses due to their involvement in the mortgage meltdown, I guess it's just the banks and the homeowners who are paying the price. Investors (apparently) have their losses covered by insurance.