The one basic principle which I have consistently preached in this column is that in the world of securitized lending, it is profitable to foreclose. It is continually frustrating to me that it is hard for people to grasp this concept, because it runs directly contrary to the universal notion which everyone clings to – your bank want to get repaid on its loan, right? The problem with this logic is that when it comes to a securitized loan, one that is bundled with thousands of others, and sold as a stock certificate on Wall Street at an enormous profit, the logic starts from a flawed premise, and this inevitably leads to a faulty conclusion. With a securitized loan, the bank you are dealing with is not your lender.
Once you understand and accept that basic point, the rest naturally follows. Since the bank you are dealing with is not your lender (i.e. does not own your loan), then it logically follows that it cannot possibly lose a dime no matter how “upside down” you may be on your mortgage. However, it gets worse. The bank you are dealing with is not only not your lender, not owning your loan, thus having nothing to lose in the foreclosure process, but actually has everything to gain. This is so because it has inserted itself in the loan transaction as an interloper; it has taken out insurance or other financial products which will provide an additional source of payment to it if your loan goes into foreclosure. This is akin to someone other than you taking out insurance on your house, burning it to the ground, and then collecting the insurance proceeds after your house is destroyed.
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