Help me understand mortgage companies...

[threecrazykids]

Ok, so with the huge influx of mortgages going into default why aren't mortgage companies more willing to help out people hitting rough times? I understand business is business, but how can all of these foreclosures be beneficial to them? For example...if people are working desperately to pay their mortgage and simply need a reduced payment due to X circumstance, why won't the mortgage companies extend their term to reduce the payment? Or, why not reduce the interest rate for say 5 years, then it goes back to what the original mortgage was signed for? Or is it more beneficial to sit on literally thousands of houses that are being foreclosed?

My husband was laid off in November and we are going through a remod right now, and yes, it's painful (as I would expect it to be). However, I guess when I look at the end result the mortgage company will come out even MORE ahead by extending our term etc (ours is still in the works so we've only been given an idea of the options that may or may not be available to us, but in all circumstances they will end up with more money than originally signed for on our original mortgage).

I'm not speaking to my situation specifically, I guess I'm just confused as to where the company would benefit by in essence forcing foreclosure by not working with people on payments, versus keep them in their house, and still end up ahead in the end.

What am I missing? I know there are many financial guru's here who will be able to explain it so help me understand please.

 

[msmayor]

In part because mortgage companies don't own the mortgages...they are packaged and 'sold' in bundles as securities to investors who want their money on the schedule you originally agreed to.

Mortgage companies are, for the most part, only the originators who arrange and close the mortgage. Some will retain "servicing rights", which means all they do is collect your payment and then send it off to the true owners of the note.

You can't assume that they come out 'more' ahead by allowing you to extend your term and/or lower your rate. The mortgage bonds that your loan is packaged in carries an interest rate payable to the investors, and they are not going to accept a lower rate than stated on the bond. Instead, they are LOSING money because they can't re-sell the bond for what they paid - with folks asking for rate and term reductions, they have to cut the price of their bonds to make up for what's happening with the underlying mortgages.

 

[akcire]

When a company loans you money to buy a house, they are investing. Each time someone whom the have invested with pays their mortgage they are "making money". Each time someone doesn't pay, they are "losing money".

By foreclosing they can write off their profits against their losses, essentially off setting their corporate tax liability. Some mortgage companies have been doing very well in the past 36 months due to the large amount of mortgages that were written off and the government bail out.

They are also able to take depreciation on the "distressed properties" they sell. Trust me, I understand what you are saying, but with the current tax codes there are benefits to foreclosing on people.

Also like a previous poster stated many of the mortgage companies are just service's. They don't have any vested interest in you paying or not, they are just contractually obligated to attempt to collect and keep records. Your loan could actually be owned by anyone.

Additionally, since the majority of the profits are made by a mortgage company at loan origination, it is in their favor to have many properties active for sale that can have new mortgages.

There are other ways to profit from foreclosure, but those are the basics as they were explained to me. I too thought it made more sense to keep people in their homes???

 

[threecrazykids]

I kind of get it, but when we got the "rough copy" of some of the offers that could be on the table if we qualify for a remod, in the end, we (as the buyer) could end up paying between 15-20k more in interest the end by simply extending our loan by an additional 5 years.

I know that's not a huge amount in our case (to the investors) but given the number of foreclosures those numbers have to add up. I would think that they would rather keep someone in the house, knowing they are going to end up getting an additional "investment" in the long run versus foreclosing on it....but again.

 

[MrsPete]

You're thinking like a person, not a business.

The mortgage company is a business. They are not your friend. They do not care to "help you out" through hard times. They want to make money.

If you fall behind a little, they're going to fine you (money in their pocket) and hope you catch up. They make more money from you, and they don't have to go through the expense of foreclosing.

If you actually default on your mortgage, they get to keep the house AND any equity you've paid in. Yes, they have to get you out and sell it to someone else before they actually have the money, but they make money. They'll have your money AND someone else will start paying for the house all over again.

 

[akcire]

I kind of get it, but when we got the "rough copy" of some of the offers that could be on the table if we qualify for a remod, in the end, we (as the buyer) could end up paying between 15-20k more in interest the end by simply extending our loan by an additional 5 years.

I know that's not a huge amount in our case (to the investors) but given the number of foreclosures those numbers have to add up. I would think that they would rather keep someone in the house, knowing they are going to end up getting an additional "investment" in the long run versus foreclosing on it....but again.

The problem is you are not a sure thing. By allowing you to extend your term they are taking on additional risk. You aren't buying in with a bunch of closing costs that can fatten up their bottom line.

Additionally they run the risk of the tax codes changing. If you default again 3 years from now, and they can no longer take a loss on the property, they miss a government program, (etc.); then they are out a sure thing. In business, you want to make as much money as you can as fast as you can--it doesn't have to be logical or ethical, just profitable.

 

[threecrazykids]

You're thinking like a person, not a business.

The mortgage company is a business. They are not your friend. They do not care to "help you out" through hard times. They want to make money.

If you fall behind a little, they're going to fine you (money in their pocket) and hope you catch up. They make more money from you, and they don't have to go through the expense of foreclosing.

If you actually default on your mortgage, they get to keep the house AND any equity you've paid in. Yes, they have to get you out and sell it to someone else before they actually have the money, but they make money. They'll have your money AND someone else will start paying for the house all over again.

I understand they aren't my friend and nor do I expect them to be my friend. If they sell my house for 1/2 of what I paid for it in a foreclosure vs tacking on an additional 5 years and simply lower the payment how does that make smart business sense?

Again, business is business and I see that becoming the mentality of homeowners. They are growing more and more numb to hearing over and over that it's horrible to not repay your debt. The companies say "Call...we will be MORE than willing to work with you, that's what we're here for". I think some companies are, however many are not.

So then should people just say "this is no longer a smart investment for ME so I'm walking away...my tax money is going to bail you out so you win either way"? It's just a vicious circle. If business is business, then it's every man for himself and if it's not a smart investment then simply walk? I don't believe that is right either. (I'm not implying you are saying that in your thread).

I don't want this to become a pay or not pay thread, I simply am trying to understand how it can be profitable to be sitting on literally hundreds of thousands of empty houses with no one paying on them.

 

[GrnMtnMan]

Have you been to www.knowyouroptions.com?

 

[Lisa loves Pooh]

My primary mortgage on my first home was sold.

It is highly likely that it was broken into bits and pieces and packaged and sold as featured on the special "House of Cards". Now--as far as our terms, we were not those risky crazy mortgages. Just a typical FHA mortgage. None the less, it is likely what happened to it.

In any case--our bank was able to work with us on our second mortgage b/c they owned it. Not a darn thing they could do about the first mortgage. While they don't own it--they do "manage it", so it isn't like I could call ABC mortgage company and have a chat.

We could have refinanced our home (upside down) and had much better terms, but they just "can't"/won't do that. I get why on paper they can't. They don't wish to assume a liability that they sold years ago. Even though the second mortgage essentially has no collateral at all.

What I do not get--is they sell CARS all of the time that go down in value once you drive those off the lot. And they constantly let you roll over the loan from a prior automobile into it. So you have huge negative equity before you even leave the parking lot. That is what I find laughable.

Anyway--our bank could help us with our second. Had they had the whole thing--they could have helped us with that as well. But they didn't. The odd thing, they said they could only provide help if we could still pay the bill with the help.

So--I can't pay the (fake number) $1000 mortgage, please lower it to $900. If they demonstrate that I cannot even pay the $900, there is no point for them to "help me", b/c their help won't do any good at all. ETA: we had enough severance and additional assets that we could pay the adjusted number, so we were approved for a 1 year reprieve. At 1 year (just happened), the payment was readjusted, but it is still lower than what it was originally and is now permanent.
As it stands--if my bank could "not help"--they would get nothing in the event of foreclosure. After all the fees and legal costs, the original mortgage would have gotten most of their money. The second mortgage, nada. It remains that way right now. At some point, we'll be in the positive on that home value. Just not today.

 

[MrsPete]

I understand they aren't my friend and nor do I expect them to be my friend. If they sell my house for 1/2 of what I paid for it in a foreclosure vs tacking on an additional 5 years and simply lower the payment how does that make smart business sense?

Again, business is business and I see that becoming the mentality of homeowners. They are growing more and more numb to hearing over and over that it's horrible to not repay your debt. The companies say "Call...we will be MORE than willing to work with you, that's what we're here for". I think some companies are, however many are not.

So then should people just say "this is no longer a smart investment for ME so I'm walking away...my tax money is going to bail you out so you win either way"? It's just a vicious circle. If business is business, then it's every man for himself and if it's not a smart investment then simply walk? I don't believe that is right either. (I'm not implying you are saying that in your thread).

I don't want this to become a pay or not pay thread, I simply am trying to understand how it can be profitable to be sitting on literally hundreds of thousands of empty houses with no one paying on them.

They aren't going to sell it for 1/2 its value in foreclosure. When we were looking for our first house, we thought we could get a good value by choosing a foreclosure. We couldn't. The bank-owned houses at which we looked all sold for just as much as the others. They're going to make more by taking the house than they will by being lenient with the customer. Admittedly, the housing market is different now, but -- at least in my area -- it isn't down by 50%.

I don't necessarily think this is the same as walking away from a mortgage. A bank has a contract, an agreement into which it and the consumer entered together. If the bank takes a home, they're living up to the contract. If a person walks away from a house, that person is breaking the contract.

Basically, you're asking why the banks don't re-finance instead of foreclosing. You're asking why they don't attempt to re-negotiate a new agreement with the buyer about how the balance will be paid off. I see that as something that should come from the homeowner's quarter -- not from the bank. The bank doesn't have any way to know that you're going through rough times -- until you miss a payment, and after that you look like a risk. They don't want to re-negotiate with someone who's a risk.

 

[PrincessDadx2]

What am I missing? I know there are many financial guru's here who will be able to explain it so help me understand please.

If you have PMI or and FHA/VA loan the insurance/govt will make up the loss, so you will get foreclosed on.

For other loans it comes down to the investors. When they created the mortgage securities they created layers (tranches) of investors:

Layer 1 - low risk, low interest rate. They get the first of any payments that come in.

Layer 2 - more risk, higher interest rate. They are second in line.

Layer 3 - even more risk, even higher interest rate. Next in line.

Etc.

For the layer 1 people to get paid in full they only need to collect 25-50% of the value on your foreclosure (depending on the deal). They do not care about your problems, they want the money. People in layer 3 want you to modify and pay because if they foreclose they will lose everything. The loan servicers and courts have been reluctant to help you and screw investor one. This would be an illegal transfer of wealth from layer 1 to layer 2-3+. Layer one is due the money by contract, and you are due to lose the house by contract. The only way they can help you is to hurt the investor and break the contract. The govt. can "encourage" people to help, but not "steal" the money from other investors, at least not yet

The bank made the money off your loan a long time ago by the fees from making it and selling it. The only way a bank would work with you is if they actually owned the loan. Then they would have an incentive to maximize the money paid and would work with you if they thought that would be the best thing. Otherwise they will foreclose to protect the investors who are first in line.

 

[threecrazykids]

I'm understanding this much more now. I think I was just looking at it more in black and white terms and didn't know all the back end things that go on.

I guess I just kind of picture it as this (as an example and probably a bad one but humor me):

Mortgage loan = 100,000 @ 5% interest for 30 years = X (amount paid over the life of the loan) @ say $500.00/month

VS

Mortgage loan = 100,000 @ 5% interest for 40 years = X (amount paid over the life of the loan) @ $400.00/month

Scenario 2 would end up with them making more in the end. I would think if it were me, I'd rather at least keep someone paying on the house even if it was less per month vs. not knowing if/how long it would be before going through foreclosure, possibly sitting for quite sometime with the housing market, and then auctioning it off (for less than the original mortgage in most cases) etc.

I'm clearly oversimplifying this, and I thank you for helping me understand a little better.

 

[Kathi OD]

While this is a propaganda piece, it does explain why it is beneficial for lenders to let your loan go to foreclosure.

http://www.youtube.com/user/fiercefreeleancer

 

[sweetdana]

1st in re: to extending a mortgage term. This is not an option with the contract you likely signed up front. (OR THEY WOULD!)

There are rules with loan mods. Meaning if your debt to income is not 31% or less, they cannot assist you. Being that usually 1 party is unemployed this is a tough # to meet. Most people who need them do not qualify. They would need to reduce the payment so much they could not get principal on the loan. This in and by itself is red tape the gov dropped on modifications. Loan mods usually do not exceed 24 months, and the more comman ones are 6 months - 1 yr, not 5 yrs. If they went longer like 5 yrs the payment in 5 yrs would be astronomical, as the orignal term cannot change. I think there are 2 states that allow this, but not normally.

Even assuming a client qualifies, over 90% of loan mods still end in default. It is sad, but it is a fact. Meaning if they help you out, and lower your payment for 6 months or 1 yr, to less than the interest due on your loan, clients are still not likely to pay it. Payments would increase from the current payment in 6 months to a yr. (Due to deferred interest and shorter term left on orignal contract.) Clients make a lower payment for 12 months, then it raises to more than it started at and they walk away. The lender I work at used to do loan mods, even more than the industry standard, but it is now hurting them, as 6 months a yr down the road situations seem to not be too different.

Believe it or not the fear of default, is the reason they foreclose. May sound backwards, but if they charge lower payments than they are paying out through a mortgage backed (GOV insured usually) security, they benefit more by foreclosing. If they foreclose Fannie or FHA (most commanly) owns the riskiest 20%, and they own the 1st 80%, they get most of their $$. So as long as they get 80% of the orig. value.. they are ahead.

Loans are insured probably 95% of the time, so the "payment collector" (whom you make your payments to), will get paid if either the client pays them, or they foreclose. It is a misconception that a lender holds the risk on a loan. This is 95% of the time not true. Nearly every mortgage is underwritten to a standard and insured by someone else. (Fannie, Freddie, and FHA and prob 95% of them.) There are very few privatly help (non-tradable) mortgage loans. Meaning if they foreclose on you they will ask someone else for the $$ that was not covered by the sale of the home.

I wish you well, and hope that it works out.

 

[seashoreCM]

Psst! The vast majority of mortgage loans done by banks are sold to investors in the same fashion that mortgage companies operate. Or you could say that the mortgage department of a bank is a mortgage company.

The same investors (insurance companies, pension funds, Fannie Mae, even other banks) buy the packages of mortgage loans from banks as they would buy the packages from mortgage companies.

A small number of bank mortgage loans are held by the bank which collects the monthly payments. They are called "portfolio loans" and usually ahve a higher interest rate compared with mortgage companies.

 

[SweetPeasMom2]

The bank doesn't have any way to know that you're going through rough times -- until you miss a payment, and after that you look like a risk.

Not in our situation. We called. We asked for help as we saw the writing on the wall. We were still current on our payments. But that is where the run around started. It got worse when dh got laid off. So when we were current and he had a job, they didn't want to help us. When he got laid off and we could no longer make the payment, they didn't want to help us.

Meaning if your debt to income is not 31% or less, they cannot assist you. Being that usually 1 party is unemployed this is a tough # to meet. Most people who need them do not qualify.

Even if you meet all the requirements and qualify, they still won't necessarily work with you. If you go to the Making Homes Affordable site and look at the list of requirements and the options they have, we met ever single one. I did the math. If they lowered our payment by extending it out to 40 years vs. 30 years and lowered the interest to the lowest possible under the program, I got a number that would be well w/in their requirements. They actually modified it for the trial period to the same number I came up with (not saying they used my number). We made that payment for 9 months with no problem. I made it early every month (the week before). Guess what? They still denied us.

There are so many house just sitting. There is no signs marketing them for sale. They refuse to lease them out. They just sit there, for years sometimes. This is not good for many reasons. There is no upkeep on the houses. There is not anyone living there to keep it heated and cooled on a regular basis. They just sit empty. Why? Because the government will pay the difference the house sells for vs what was owed on it.

I have a friend that lived in their house for 10 years and never missed a payment. The applied for the program and were denied because they made too much. Their gross income was more than 31%. But they were never notified. It wasn't until he got laid off and she called to give an update to the bank as to the situation, that was when they told her they didn't qualify for the program. Then because he was unemployed, there wasn't enough income to qualify them. So guess what? They lost their home.

This is a obviously a very sensitive subject for me. It just kills me that there are so many houses just sitting. The banks already say that they are overwhelmed and can't handle the paperwork. Well if you'd just work with the current homeowners, then it might just work it's self out.

 

[sweetdana]

Making home affordable program is a refinance, not a modification. Because you should have qualified for the HARP (making homes affordable) loan, does not have anything to do with if they should/should not do a loan mod. Also due to new guidelines if you have ever had a loan mod, you usually do not qualify for a # of refinances includ HARP.

The HARP loan is refi by anyone, not ness. your current lender. Call up 5 banks and they can refi your current loan into this if you qualify. The DTI on this loan is max approval of 64%. (Unless you pay PMI then it is 45%.) There is no one who would be denied if they qualified on this loan for making too much $$. This loan is insured and the company will make $$ on it. If the LO can approve this loan.. THEY WILL, most are on commission.

A loan mod is where you can make too much $$, as they feel you can make your payments with your income. Sometimes this is not the case as they somewhat ignore debts. When deciding on the approval, they mostly look only at the housing ratio not the full debt to income ratio. They assume you should stop paying credit cards, or car loans, and pay the mortgage 1st. If you took out a second to finish the basement, or add a pool 3 yrs ago, have 2 car loans and 5 credit cards, and that is why you cannot afford the 1st mortgage payment then you are correct this is why they will not approve a loan mod. due to to high of income. I didn't make the rules.

They are not the same thing, and HARP loan you would call a loan officer at any company for (pref not current lender as they have a vested interest in you staying at a higher rate). You call your current lender only for a loan mod.

 

[threecrazykids]

Making home affordable program is a refinance, not a modification. Because you should have qualified for the HARP (making homes affordable) loan, does not have anything to do with if they should/should not do a loan mod. Also due to new guidelines if you have ever had a loan mod, you usually do not qualify for a # of refinances includ HARP.

The HARP loan is refi by anyone, not ness. your current lender. Call up 5 banks and they can refi your current loan into this if you qualify. The DTI on this loan is max approval of 64%. (Unless you pay PMI then it is 45%.) There is no one who would be denied if they qualified on this loan for making too much $$. This loan is insured and the company will make $$ on it. If the LO can approve this loan.. THEY WILL, most are on commission.

A loan mod is where you can make too much $$, as they feel you can make your payments with your income. Sometimes this is not the case as they somewhat ignore debts. When deciding on the approval, they mostly look only at the housing ratio not the full debt to income ratio. They assume you should stop paying credit cards, or car loans, and pay the mortgage 1st. If you took out a second to finish the basement, or add a pool 3 yrs ago, have 2 car loans and 5 credit cards, and that is why you cannot afford the 1st mortgage payment then you are correct this is why they will not approve a loan mod. due to to high of income. I didn't make the rules.

They are not the same thing, and HARP loan you would call a loan officer at any company for (pref not current lender as they have a vested interest in you staying at a higher rate). You call your current lender only for a loan mod.

Ok maybe I should clarify...what we are doing is the HAMP with our current lender, not a mod. I didn't realize this could be done with ANY lender, and didn't have to be done through our current mortgage holder.

I just hope that somehow, some way, everyone who is struggling can get back on their feet and have a prosperous future.

 

[Colleen27]

I understand they aren't my friend and nor do I expect them to be my friend. If they sell my house for 1/2 of what I paid for it in a foreclosure vs tacking on an additional 5 years and simply lower the payment how does that make smart business sense?

It is all about externalized risk - if the bank forecloses, they aren't necessarily the ones losing. The people who bought the repackaged loans as investments lose. But if they continue to collect they're risking incurring substantial additional costs without any additional profit; as has been noted the lender's profit comes mainly at origination with the interest paid going to those third parties that actually own the debt. And if you have mortgage insurance or a recourse loan there's even less incentive for them to take any risks in continuing or modifying the loan, because they have insurance to offset any loss they do take and/or the option of continuing to pursue collections against the homeowner even after foreclosing on the property.

They aren't going to sell it for 1/2 its value in foreclosure. When we were looking for our first house, we thought we could get a good value by choosing a foreclosure. We couldn't. The bank-owned houses at which we looked all sold for just as much as the others. They're going to make more by taking the house than they will by being lenient with the customer. Admittedly, the housing market is different now, but -- at least in my area -- it isn't down by 50%.

That depends entirely on the market. We've had friends lose homes on 80-90K mortgages that ended up sold as foreclosures for 20-30K, so the banks aren't even getting 50% in this area. The house we live in was foreclosed on for 137K and we bought it for 25K. In the time it was bank-owned they paid 3 years' worth of taxes, about $6000 in all. But as PrincessDadx2 said, the mortgage insurance makes up the difference so there's no loss to the bank.