A few weeks ago, I had an argument with a friend about the current foreclosure crisis. Despite all the news stories to the contrary, this person did not believe that the foreclosure problem was very widespread. His reasoning was that banks are rational economic actors and that its clearly in their best economic interest to modify mortgages rather than foreclosing on them. He thought that the media had overblown the problem, and that the reality was that banks were modifying most mortgages and only foreclosing on those that had absolutely no chance of being repaid. I disagreed, and shared the frustrating experiences of some of my clients who had been given the modification run-around by their lenders for months only to ultimately be served with a foreclosure notice.
According to a new study conducted by Allan M. White, there is strong data to support my position. Mr. White is a professor at Valparaiso Law School in Indiana. He analyzed nearly 3.5 million sub-prime mortgages in securitization pools overseen by Wells Fargo. The loans were written between 2005 and 2007 and contained mortgages handled by the nations five largest mortgage servicers. Its important to note that Mr. White’s data did not contain any prime mortgages.
Mr. White found that mortgage modifications peaked in February 2009, and have declined every month since. Meanwhile, foreclosures have risen steadily during the same time period for the same pool of mortgages. And Mr. White’s study sheds some light on just how much money banks lose when they foreclose on a mortgage. According to his data, the average loan was approximately $223,000. The foreclosed properties, on average, sold for $79,000 at foreclosure sale. In other words, each foreclosure studied by Mr. White resulted in an average loss of $144,000 for the lender. According to Mr. White’s study, foreclosures in June 2009 alone resulted in approximately $4.59 billion dollars in losses for the lenders. These losses are even more staggering when compared to the losses incurred by banks for mortgage modifications. In June 2009, the banks losses resulting from mortgage modifications was approximately $45 million.
“There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”
Take that, friend.
New York Times: So Many Foreclosures, So Little Logic.