Over the past five years, I have talked with more than 1,000 homeowners struggling with mortgage issues. While doing so, I explained to them that the way the loan securitization works, that is the process whereby loans are bundled by the thousands in a loan pool or trust, and sold on Wall Street as stock certificates, it makes it profitable for the banks in control of your mortgage to foreclose. The reason is quite simple: those banks do not own your loan and therefore have nothing to lose, no matter how “upside-down” you are.
On the other hand, they actually have everything to gain because the purchased financial products, such a mortgage insurance and credit derivatives, which pay off upon foreclosure. Nothing to lose + everything to gain = foreclosure pays. While giving this explanation to people trying to understand why their bank is kicking sand in their face as they try to work things out, I have often said in effect, “and if you don’t think foreclosure is profitable for the banks, I’ve got a deed to the Brooklyn Bridge I’d like to sell you.”
Jason’s story may be the most dramatic example of the profitability of foreclosure I’ve see. Even though his interest rate was high, Jason always made his payments on time, and was current on his mortgage in November, 2012, when his bank approached him about what it called a “cooperative short sale.” By this what the bank was proposing was that it would accept approximately half of the amount Jason owed on his mortgage, if he found a buyer at that price! Keep in mind, Jason was current on his payments at this point. Not believing his good fortune, Jason quickly agreed to the bank’s offer, and proceeded to easily find a cash buyer of his home, thereby completely his end of the bargain.
On the other hand, the bank’s real intention in making its unbelievable offer to Jason was soon exposed, as it refused to allow the sale to go through. What it obviously was hoping was that Jason would stop making his monthly mortgage payment while the deal was pending, thus luring him into default on his loan, putting it in a position to get what it really wanted — foreclosure. Unfortunately for the bank, Jason did not take the bait. Even though he complied with the terms of the deal, and found a buyer at the bank’s requested price, he kept making his monthly payments through the process.
Its plot now foiled, the bank has come back with another device meant to trick Jason into a position which would give the bank a credible reason to foreclose — a short sale. However, the gig is up for the bank. Isn’t it indeed ironic that we are going to give the bank exactly what it doesn’t want — continuing payments on time by Jason? No default, no foreclosure! Beyond that, however, we are going to demand that the bank go back and complete its promise to allow the sale to the buyer at the dramatically reduced price. The banks just hate it when borrowers make their payments on time and deny them the ability to foreclose! Still don’t believe foreclosure is profitable? If not, please call me, as I have a deed to the Brooklyn Bridge I’d like to sell you.
Copyright 2013 Daniel L. McGookey