“I read recently that banks are telling people they need to go into default to do a loan modification, then they’re foreclosing on the home. The article said banks do this so they can get the home at auction for far less than its value. Is that true?”
Answer:
That’s absolutely 100% incorrect.
Despite all the bad press about greedy banks foreclosing on people on purpose, banks lose in so many ways when they foreclose:
1. They lose money, often 50% of the loan balance or more
2. They have less money to lend, so they lose out on interest
3. They’re more at risk for financial problems, including being taken over by the FDIC and shut down or sold
Banks prefer these scenarios, in order:
1. Borrower keeps paying
2. Loan modification for qualified borrower
3. Short sale
4. Foreclosure
Understand, I’m no apologist for banks. And I know they’ve messed up many a loan modification.
But I understand their incentives. They do NOT want to foreclose on people. This is not because they’re nice. It’s because they lose more money than in the other scenarios.
