Riding the Hamster Wheel

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