Are banks incentivized to do a foreclosure on your home instead of a short-sale or modification?

Several clients have come to me lately and complained that they have been declined for their home loan modification after they have successfully made payments on a trial loan modification for a period of time.  After a long period of making the payments on time and without fail they naturally believe that the have been approved for the permanent modification.

This is a natural and logical conclusion.  During a “trial” period you would naturally show that you are capable of sustaining payments on a loan.  It is logical that after you pass that test then you get to keep the new payment schedule.

This is not true in the strange and mysterious world of the banks.  My clients are receiving no notice but just a returned check one day when they send their payment in.  They then call the bank believing there is some mistake and then they are told that their loan modification has been refused because they “don’t have enough income”.

The homeowners have made the payments faithfully but the bank has suddenly determined that the don’t have enough income.  I smell a rat.  Information is beginning to trickle out that these banks are incentivized to do foreclosures.  They are paid when they first sell the loan to Fannie mae or Freddie mac but they are apparently paid again if they take back a home in a foreclosure.

They seem to get no such benefit if the homeowner keeps the property with a loan modification or if the home is sold to a buyer in a short sale.  The incentives are all wrong.  Apparently the Obama administration has put this incentive in the bailout plan and now we are now reaping the whirlwind.  Homeowners are being thrown out of homes that they should stay in so the banks can make money which they make only because of government incentives.  Shouldn’t the incentives be to keep homeowners in their homes?

Anyone miss the era when the bank lent out its own money?  I do.  This is an unsustainable situation and apparently people are getting wise and lawyers are beginning to sue the banks.  One lawyer who does these suits in federal court told me that the banks can’t answer or defend all the suits that are coming because of this foreclosure crisis.  He says that this is why they are suspending foreclosures and why there is a growing cry from all over the country to do just that.

It is clear that something has to be done as this foreclosure mess is unfair, unsustainable, and as badly managed as it can be.  More to come……

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