Why Are Banks Unwilling To Work With Homeowners Facing Foreclosure?

I was sent this email a few weeks back but haven’t gotten to it yet, and I let it stew a little bit before digging in on it because it really dos hit on a few levels.  You’ve got to step back though and realize that the banks are in trouble too.

They’re out looking for handouts from Obama & Co just like everyone else.  They’re not willing to help because they’re still not done milking the “Great Depression 2″ for what it is worth.  Sure, they’re losing money, but it’s still not certain that they’re not getting any more.

The Email

Hello,
I have been trying to understand a couple of things about the current financial situation and perhaps you can answer them.   Number one, Whey are banks and mortgage companies unwilling to work with home owners that are at risk of foreclosure?  How is having an abandoned house with broken windows, long grass and all of the electrical and plumbing ripped out preferable to simply taking a loss on the house to begin with. 

The Situation

How many times have we heard so far of the “bailout money” – and how many times have we heard it’s going to be overhauled or redirected or realigned?  Probably more than we care to.  I think the short answer to the question of this post is “they’re not sure where they are yet.”

How many banks have been sold since the 2007 start of the collapse?  I looked around, but couldn’t find a solid number, but do you think that is done?  I hardly think so.  Last October when PNC bought National City (of which part of my loan is through),  we just heard the part about one bank helping out another, right?

Well, not really – the truth of it is that just hours after PNC Bank accepted $7.7 Billion of the governments handout from the rescue package. In other words, the deal would not have gotten done if the money wasn’t provided to them from the government through the bailout package.

Banks are looking for deals too.  Yes it is a crisis, but people are still people within the banks.  They know money (likely better than anyone) and they aren’t stupid.  They’re businessmen too; and businessmen look for deals.

It’s a Harsh Truth, But Put It In Perspective

It’s a harsh truth, but it’s the way it works.  Picture yourself involved in your favorite card or board game.  I’ll take poker for example which fits quite well for this.  Imagine that you’re down in a hand, have mediocre cards, but you’ve already invested 40% of your total money, and still have 2 chances (cards) left to help you out.  In a perfect world, you’d have 3 options:

1.  See those cards for free and then gauge what you can or can’t bet on it. (no bailout money).
2.  Have someone help front you the cash to see those cards (some bailout money).
3.  Or as a worst case scenario, see those cards for as little as humanly possible (use your own money).

Obama is the dealer in this scenario and he’s not even sure if he’s going to give you 2 more cards or 5 more.  He’s not even sure how much will go to you to help you if you chose option #2, but one thing is for sure – it would be very bad business practice to base your decision on information that is not complete, which is what the banks would be doing if they helped you now.

They’re harsh words, I agree.  I’d like to see it fixed as well, but banks aren’t stupid.  They’ve been around a long long time and know how money works.  This is a bit of a wild card as it’s the first time the government has stepped in to pump so much cash into the environment.  It blurs things a bit – but not to the point where banks aren’t looking at all their options.

What CAN You Do To Try To Get Help

If I’ve established one thing, it’s that the banks aren’t going to proactively help you out at this stage of the game.  It’s not in their best interest right now (crappy, but true).  However, it’s not like they’ve never been asked the question before, you just have to know the right people to talk to and get a shot at a valid refi or help.  As I’ve always heard, if you want things done right, do it yourself.  Use that thought when checking out help for your house.

Call up your bank but don’t talk to customer service; their job is to tell you to get lost.  You want to talk to the “loss mitigation” department. They hold the chips you’re looking to get in o, but before calling them, make sure you have your ducks in a row:

  1. Make sure you know the actual loan balance and true current value
  2. Get comparable homes in your area from your local MLS or online system to verify similar properties that have sold within a 5 mile radius
  3. Take pictures of the property – inside and out – indicating the present condition, and what repairs will be necessary to bring the possible foreclosure property back up to sale-able condition.
  4. Take pictures of the neighborhood – especially of other properties for sale on the same street. This indicates competition for the bank.
  5. Contact the financial institutions “Loss Mitigation” department – not the customer service dept. The customer service folks are trained and TOLD to tell you “no”!
  6. Prepare and present an offer for a “Short Pay” to the loss mitigation department, using the recent sales, foreclosure numbers, pictures, rehab and repair costs and everything else to illustrate that it is in their best interest to lower your balance and payment. They say that a picture is worth a thousand words – in this, case it worth thousands more.

Conclusion

We’re on a long and dusty road that doesn’t appear to be getting any shorter anytime soon.  The short story is that people are waiting to be rescued and unfortunately if you take it that way, you’re just sitting on the sidelines and are likely hurting yourself.  Be proactive in getting what you want/need.  If they shut you down try another bank or another lender.

If you’re sitting late on payments, Obama isn’t your magical answer; unfortunately, he’s the magic answer for people working at the banks, and you can be assured that THEY’RE being proactive with Congress trying to state their case and need for the money, but to give you the bad news, it’s not our magic bullet. It may help us in the future, but the money isn’t going directly to us (at least as it stands now), it’s going to the banks.  After that, we’ll get our turn to deal with them based on how they’ve allocated it.

Don’t lose hope, you can still take a shot at the steps listed above to help you out; banks have always had that division in their structure but I’m sure it’s just a little tougher to get to now.  Yes, they want to help you, but not as much as they want to see the rest of their cards from Obama first, and I have to say, I don’t like it, but I don’t blame them.

Photos by: Martin Pettitt, roland

Filed Under: advicemortgagesReal Estate

  • http://investing.curiouscatblog.net/ Curious Cat Investing Blog

    I don’t actually agree. Banks have not shown “They know money (likely better than anyone) and they aren’t stupid.” Many acted like stupid spoiled children. They got themselves in big trouble because they didn’t understand money and economics and markets.

    The main reason I think banks are not making smart deals now to reach compromises with the mortgage holders is they don’t know how to do so. They have gotten into financial arrangements that are unnecessarily complex (done out of greed and not understanding financial instruments). Instead of straight forward mortgages they have very complex derivatives and what can be negotiated is difficult for them to understand.

    The costs and benefits of renegotiating are not easy to see. My guess is that doing so will provide significant benefit to the lenders and the borrowers and the economy overall. But that is a guess. I trust my guess much more than the average banker and certainly more than the fools that didn’t understand the ponzi like scheme of mortgages that could not be paid off by income and only by ponzi like new mortgages.

    Curious Cat Investing Blog’s last blog post..12 Stocks for 10 Years – March 2009 Update

  • http://weakonomics.com the weakonomist

    The banks aren’t lending because even under the best re-fi conditions, many of the people still can’t afford their homes.

    Congress gave them the money but they won’t let them be stupid with it again. The funny thing is Congress doesn’t even realize they did this!

    Granted there is an exception to any generalization, but I work at a bank and I’ve seen the re-fi apps come through.

    the weakonomist’s last blog post..What We Can Learn From Forbes’ Richest People

  • http://www.mccollam.com/jakeblog/ Bill McCollam

    hm… if i’m in a poker game with 40% invested and a bust hand – I’m throwing them in and looking for a better spot. I think in these cases it just comes down to a realistic assessment of expectations. Easier said than down when its all coming down around you.

    Bill McCollam’s last blog post..Geocaching: Fun, frugal and good for you

  • http://www.jamesfowlkes.com Investing For Life

    Avoid forclosure, do a quick sale. Start over renting something that fits within your budget. Do not repeat the mistake of buying a home you cannot afford. The Joneses are losing their shirt, so stop trying to keep up with them.

    Investing For Life’s last blog post..Why I Hate Load Funds and You Should Too?

  • Pingback: -> Monday Morning PF Blogosphere Roundup: Don’t Forget To Vote! | Bible Money Matters

  • Pingback: -> Monday Roundup And Link Love! | Bible Money Matters

  • christian

    I always wondered why but I think it’s just a matter of dollars and cents at the end of the day.

  • Pingback: Personal Finance Resource Links 04-05-09