So Many Foreclosures, So Little Logic

An article in today's New York Times reports that foreclosures are picking up speed. That's not a surprise. But what is surprising is that many lenders are apparently neglecting less expensive alternatives to foreclosure, alternatives such as loan modificaitons. When it seems to make greater economic sense to keep borrowers in their homes paying a reduced amount, than it does to toss them out and wind up loosing tens of thousands of dollars more, why aren't lenders selecting the less expensive alternative?

The article reports on a recent study of 3.5 million subprime loans in securitization pools overseen by Wells Fargo. The analysis showed that, among recent foreclosures from that pool, the average loss was 64.7 percent of the original loan balance; a staggering $144,000 loss on the average $223,000 mortgage.

This is much higher than the roughly $60,000 loss per foreclosure that others have estimated (see previous post). One explanation for the difference might be the recent study's focus solely on subprime loans. Another explanation could be the rapid decline in home values since the earlier estimates were calculated, a decline which means greater losses when homes are foreclosed.

Regardless of whether the loss per foreclosure is $60,000 or $144,000, the basic premise is that lenders have a lot of room to restructure loans and reduce borrowers' monthly mortgage payments -- and still end up in a better economic position than they would at the end of a long and costly foreclosure process. Why aren't more loans being modified?

The full artcile is available here.