Since the housing bubble burst three years ago, banks of all sizes have seen their ledgers bleed red as many of their costumers,' with their houses in tow (or was it the other way around?), went 'underwater." As a result, and in an effort to stem the loss of further capital, banks are quietly contacting borrowers and offering them generous loan modification or refinancing options-in some cases,borrowers reported debt forgiveness or nullification that was as much as 50% off of their original mortgage agreements. Many of these newly relieved borrowers pay on time, too. However, their houses are 'underwater,' meaning what they paid for the house or what they still owe is more than their property is worth.
In the midst of the 2008 financial collapse, megabanks like Chase and Bank of America bought, more fittingly, inherited, billions of dollars of junk mortgages. These mortgages were made available to borrowers with little or no credit at ultra-low interest rates. In an effort to offload this lion's share of bad equity, banks are choosing to unburden the borrower through generous loan modification initiatives.
Debt Forgiveness
If large-scale debt forgiveness appears counter intuitive and unusual for banks, that's because it is. But it makes sense. Having a borrower/consumer trapped under onerous debt is stressful for all parties involved-the bank, the borrower, the borrower's family, and, significantly, the future client.
If you consider consumer confidence a measure of their purchasing power today against what they perceive is their ability to purchase tomorrow, someone stuck with an underwater mortgage doesn't lack spending confidence alone. They potentially are rendered anemic, one-time costumers to their banks and other credit services.
Take this phenomenon a step further: for banks, people are the capital they are likely to generate in their lifetimes. Having a million or so costumers go belly-up because of foreclosure and subsequent bad credit would result in systemic, large-scale bad credit on the side of the bank or lending institution (i.e. the US Government). The more junk mortgage banks can wipe from their ledgers, the better. Or so goes the thinking.
Banks Aren't So Bad
It is significant that banks are accepting a larger role as stewards of the US financial system. Ultimately, though, the debt has to go somewhere. The idea that banks relieve the borrower to empower future consumers has significant pitfalls-namely, what if it doesn't work? If banks are forgiving up to half of a borrower's mortgage debt, doesn't that mean they see the borrower's earning/spending power as halved? Remember-these are people who are frightfully good with numbers.
At the moment, loan modification may be the only tenable option for getting banks and their costumers out from under loads of bad debt. It is still approximate treading water in a country where the unemployment rate hovers around 10 percent. If, by design, it is meant to unburden the consumer, clear banks' ledgers and get back to making money through improved consumer confidence, it may just work because financial institutions-with their armies of highly educated, financially prudent workers-- are, arguably, more fit to tread water in the long-term. Let's hope it pays off.
The Lee Law Firm's foreclosure lawyers have many years of experience in all aspects of mortgage modification. They have extensive knowledge of foreclosure laws and aim to provide their Dallas foreclosure clients with a plan to keep their home and obtain a solid financial future.
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