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Riding the Hamster Wheel

03 Jun

I received some very supportive comments in response to my post last week. Thank you! Reading support from people who have been living with foreclosure like me lets me know that other people out there think as I do. While reading the comments, thoughts started swirling in my head – although I do not do financial modeling, I have heard of game theory, and I am wondering if there has been anything studied or written recently applying game theory to individual foreclosed homeowner’s decision processes. Sure, this is really, really analytical. But I can’t help but wonder if there was some sort of “map” people could look at to see what their best options are, the agony of making a decision could be lessened.

One of my readers brought up the term “hamster wheel”, and, certainly, this is an apt term for the situation many foreclosed and about-to-be foreclosed homeowners find themselves in. Trying to make the decision whether to stay or go is very much like running on a circular wheel and going nowhere, despite the illusion that if you just run fast enough, you might get somewhere else.

Even our own attorneys aren’t always the best resource for advice either, because their goal is usually to keep homeowners in their homes. Also, many of the lawsuits arising from the market collapse are still being decided. Laws have changed in the interim that have rendered some of the earliest charges entered against mortgage companies obsolete. So, no one knows what the best course of action is. This brings the first spin on the hamster wheel back around to – you as a foreclosed or almost-foreclosed homeowner must decide what is the best course of action for you.

Due to my experience, it is surprising to do a web search with the question “Why do banks prefer to foreclose?” and get back a bunch of articles in which the authors assert that banks prefer to do short sales than to foreclose. My perception may be skewed because my lender wrongfully foreclosed on me, I believe because at the time they foreclosed, my home was worth slightly more than what I owed on it, and they foreclosed without giving any notice.

I asked this question because I hear it from so many people. It is incredibly frustrating, is it not, to read the news, listen to the news, and watch all the “Bank Owned” signs dug into your neighbor’s yards, which all create the picture that banks are foreclosing in record numbers. In talking with your friends on the topic, I’m sure you’ll find that they know someone, or of someone who tried to modify their loan and weren’t able to, so went into foreclosure.

One of my closest friends saw the writing on the wall, and a year before she knew she wouldn’t be able to maintain her payments, put her place up for sale. When she couldn’t sell it after 6 months on the market and the value had dropped, she put it up for short sale. The bank refused offer after offer for a year. The last offer was the best offer – $26,000 over value, $20,000 less than the amount owed. She wound up walking away, the property went into foreclosure, and the bank wound up selling the property a year later for $90,000 less than the amount owed. When you hear stories like this, you have to wonder why banks are doing business the way they are.

Though the following is an excerpt from an article stating that banks prefer to do short sales, I found this section compelling:

“It matters little to service providers whether the home’s value falls or the home goes into foreclosure because the service provider gets paid regardless. Service providers make money a number of ways such as receiving a service fee, default fees, floated interest and/or from investment interests in the loans the provider services.” 1

My home was foreclosed on by a service provider. Since the deregulation of the banking industry, many banks have hired service providers to manage their loan portfolios. Often, the company you make your payments to is not the company that holds your loan.

Mortgage service providers are responsible for the day-to-day management of your loan, such as collecting payments and making property tax and home insurance payments from your impound accounts. These servicers have come under fire for how they have handled customers who are in default, and have been urged by Obama’s administration to permanently modify thousands of loans to help clients avoid default. It has been argued that, because of the lucrative fees they charge, they have prolonged loan modifications to maximize collecting these fees. They are the middleman between you and the holder of your loan.

So, this also makes me wonder why the owners of the loans are not stepping in and stopping the servicers from costing them money. There is a myriad maze of reasons, and I really don’t think that any one reason can be pinpointed as the overriding reason.

One author states that because 85% of the loans have been securitized into one giant pool of money, and the banks own portions of the pool of money, rather than directly owning a loan, it is difficult to tell who really owns the loan. If that’s true, then who do the loan servicers pay for the rights to collect the payments on behalf of the banks? In actuality, some of the servicers are actually the lenders, but the investors in the pool of money have first rights to receive the principal and interest payments.2

Another states that banks prefer foreclosures over short sales because it makes them appear more profitable to their shareholders. Due to accounting principles, in a short sale, the banks would have to write off the loss in value of the home, whereas if they sell the home to their Real Estate Owned (REO) pool, they can claim to still retain the full value of the asset.3 Now you also understand why the banks have had record profits over the past few years, despite the dismal economy!

There are so many more reasons, but I’ll have to explore those in another post. In the meantime, this paper is an interesting read if you are interested in understanding how the financial morass was created. It’s written by a couple of lawyers, but I found it to have simple enough language for those of us not legally-minded.

Now, I do realize that all this information doesn’t exactly get you off the hamster wheel, but I find it helpful to understand how I wound up on it in the first place.

1 http://homebuying.about.com/od/shortsale/f/Banks-Foreclosure-Short-Sale.htm

2 www.en.wikipedia.org/wiki/Mortgage_servicer

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3 Comments

Posted by on June 3, 2012 in Foreclosure

 

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3 responses to “Riding the Hamster Wheel

  1. hlberk

    June 5, 2012 at 7:54 PM

    Thank you, Kristina, for sharing your story and advice here! I agree… whatever happened to just doing the right thing? Are you one of those people who was advised to stop making your payments so you could qualify for a modification? I have also been shuffled around, and everyone knows what they are doing, but no one is stopping it. Very frustrating!
    Good for you for standing strong! Please keep me posted on what happens. I wish you ALL the best!

     
  2. Anonymous

    June 3, 2012 at 11:03 PM

    Hi Heather,

    The hamster wheel is such an apt symbol representing the state of how one feels while waiting for the ax to fall.. .also known as the limbo you face waiting for foreclosure, waiting for modification approval, waiting for something/anything to happen, so that you can move on with your life! I sooooooooo related to your post about the hole in the floor as I also had (and still have) a “hole in the floor” myself… I have to replace my rainwater catchment tank to the tune of $5,000. Now that I am “approved” for another trial, I am (slightly) more confident in thinking, yeah maybe I’ll stay here and so should get that fixed.

    But….. I know it is not over until the fat lady sings. My story in a nutshell: I was in an MHA trial for 11 months, when they asked for docs again, it was all submitted not once but a few times by my law firm, then I was told my final papers were on their way only to receive a decline for no documents instead. Calling in, i was told it was a mistake and to disregard. My shady law firm (Janian & Assoc) could not be reached and would not return calls. I escalated the case myself to my elected officials in Hawaii, who just happened to be working on new foreclosure protections. They watched as for a year, the bank lied, led me on, shuffled me here and there, declined me, offered me ridiculous in house mods, and put me on notice for auction dates. I was treated rudely, and lied to, even with the Hawaii legislator, Hawaii banking lobby and a Senior VP at BofA watched. I was offered cash for keys, leaseback, deed in lieu and any number of other “We’re here to help, we want to help you stay in your home” BS options.

    I finally hired a competent helper, someone who did not back down and helped me stand and fight. I now have an MHA trial. I feel so lucky. This time I am

    As you state here, THE SERVICERS DO WANT TO FORECLOSE. The servicers GET PAID to send out mod packages (hey, anybody else get at least 20 new packages too?) and they get PAID to foreclosure. Fannie may own your loan, but they want to foreclose also. It is in their best interest!

    It’s an oldie, but goodie but one everyone should read: An eloquently written whistleblower’s article detailing just exactly what goes on behind the scenes at a major bank. A former Wells Fargo worker openly admits mods are a scam and just one more way of extracting a few bucks out of people before starting to foreclose. This article is COMPELLING and EYE-OPENING. The servicers DO NOT WANT to modify!!!!

    http://logicalsceptic.blogspot.com/2010/12/whistleblower-says-loan-mods-by-big.html

    It doesn’t have to be this way. My advice to any and all facing foreclosure and/or awaiting modifications from these criminal banks and their servicers… . Don’t give up. Don’t take cash for keys. Don’t do short sales. Document everything, record conversations. Write your legislators. Write the White House. Stand and fight. Do it until the last dog dies!

     
    • Kristina

      June 4, 2012 at 12:44 AM

      The above post was written by me, Kristina, in Hawaii.

       

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