“How can so many homeowners can stay in their homes for years without paying their mortgage and I got foreclosed on in seven months?!”
I get this question a lot from underwater homeowners facing foreclosure.
“But so-and-so didn’t pay for four years and is still in their house!”
Yes, that’s true. This question was always on the top of my head and I didn’t know how to answer it until this Monday when Tom (the name has been changed) came into my office and gave a little presentation on how banks work.
Tom’s last job was head of a short-sale department of a major bank. Based on what he said, it all makes perfect sense.
Big banks don’t own the majority of their loans. Investors like Fannie Mae, Freddie Mac, big hedge funds, etc., own loan portfolios, and banks service the loans. If the loan is not in default, the bank charges the investor $25 a month for servicing. They send a payment coupon and process the payment. If the bank has a million loans, then multiply $25 by 1 million. That’s not bad, right?
Now ... if the loan goes into default, the bank transfers the loan from servicing department to collections department. It includes calling the borrower 10 times a day, sending letters and doing other things to collect the payment. When the loan is in the collection department, the price for servicing goes up to $300 per month. Multiply $300 by a million and you will see why banks postpone foreclosures as much as they can.
Investors caught up recently to this practice and some allow a total of six postponements or have some other guidelines to stop the above practice. If the bank owns the loan, then they will foreclosure or modify the loan almost immediately to avoid losing money.