Monday, December 12, 2005

Banks 'Afraid' To Foreclose: Slate

The Slate reports that banks don't want to foreclose. "At least one group of kind-hearted folks in the finance industry is willing to give customers a break when things don't go their way: America's heart-of-gold mortgage lenders, who are behaving with curious benevolence toward suffering clients."

"These moves aren't motivated entirely by the spirit of charity. Across the nation—even in the parts that remained dry last summer—the mortgage industry is working hard to avoid coming down too hard on overextended borrowers."

"Homeowners today are plainly stressed, especially those with less-than-pristine credit. According to the MBA, in the second quarter of 2005, the delinquency rate for residential mortgages was 4.34 percent. Some 1.83 percent of loans were classified as 'seriously delinquent,' meaning that payments were either 90 days past due or the loan was in the process of foreclosure. The delinquency rate for borrowers with adjustable-rate mortgages was 10.04 percent, and the delinquency rate for subprime fixed-rate borrowers was 9.06 percent."

"In order for the rate of home ownership to rise as it has, more marginal buyers have been drawn into the market. And they tend to fall behind on their payments rather quickly. The delinquency rate for subprime borrowers would seem to set the stage for a huge rush of foreclosures. But the big lenders have plenty of (mostly short-term) reasons and incentives to avoid taking back the houses of their nonpaying customers. And they're doing everything they can to keep their customers in their homes—even if they're not paying the mortgage on time."

"Foreclosure can also prove damaging to mortgage lenders' earnings—and hence to stock prices. When lenders classify a loan as delinquent, they're still holding out the hope that it will be paid back in full. Once a loan is marked as uncollectible—if a lender forecloses or sells it off for pennies on the dollar to a corporate repo man—the bank has to write down the value and take a hit to earnings. According to the Federal Reserve there were $8.82 trillion in home mortgages outstanding in the third quarter. So, even a small uptick in the foreclosure rate would cause the lending industry to write down billions in lost value."

"The hesitancy to foreclose says something about the evolution of the lending industry. Today, when people fall behind on their debts, the industry views it as an opportunity for new business. Mortgage brokers and lenders continually encourage strapped borrowers to roll over their mortgage into a product that allows them to reduce payments but still 'remain current.'"

"All of which means the housing boom is being fueled by the willingness of lenders to let borrowers get behind—and stay behind—on their payments. Homeowners go deeper and deeper in debt and become less and less home 'owners,' but they get to keep the roof over their heads. It used to be that only gigantic banks and corporations like Citigroup and Chrysler were regarded as too big to fail. Today, the humble homeowner enjoys that status as well."


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