I wrote a post the other day about a judge in Suffolk County on Long Island who voided the mortgage because he ruled that the lender was being arrogant and uncooperative. The lender refused to consider modifying the loan or agree to a short sale. I was talking to some colleagues about this case. I could not understand why the bank would want to have the house go into foreclosure. It would seem that a short sale or a loan modification would be in their best interest. I was informed that because of a sweet heart deal that the FDIC has with bailed out lenders, they stand to make a profit if they foreclosed. In the Suffolk County case, the bailed out bank was Indymac that was taken over by another bank OneWest. After looking into this, it is clear that this is one explanation why it is difficult to get a loan modification or a short sale. It is called a “loss sharing agreement”. This is unbelievable.
When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. Some of the major details are:
- OneWest would purchase all first mortgages at 70% of the current balance
- OneWest would purchase Line of Equity Loans at 58% of the current balance.
- In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.
How does this translate to the “Real World”? Let us take a look at the Suffolk County situation:
- The original loan amount was $292,500. Missed payments and other foreclosure costs bring the amount up to $330,000. At 70%, OneWest bought the loan for $231,000
- The current value of the home is about $200,000 and OneWest plans on selling the home for that amount. Total loss for OneWest is $31,000. But this is not how FDIC determines the loss.
- ‘FDIC takes the $292,500 and subtracts the $200,000 Purchase Price. Total loss according to the FDIC is $92,500. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $74,000.
- Add the $74,000 to the Purchase Price of $200,000, and you have One West recovering $274,000 for an “investment” of $231,000. Therefore, OneWest makes $43,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.
At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications or a short sale. Of course OneWest did not want to reveal its true motivation to the Judge in Suffolk County. Any modification means that OneWest would lose out on all this additional profit.
Although I don’t pretend to know everything - it has generally been my experience that in America, banks are organizations that are designed to follow economic laws (translation: their sole intent is to make a profit). It is clear why OneWest did not want to cooperate. In the future, if are wondering why your lender won’t modify your loan or agree to short sale, you may be well advised to follow the trail of money - as in what is going to make your lender more money.
You have a government agency, the FDIC, literally agreeing to pay hard dollars to the lender to foreclose rather than modify. In other words our tax dollars are being used to encourage lenders to foreclose. At the same time, this same government is going to “shame lenders” who refuse to agree to loan modifications. What a mess. As Shakespeare wrote “The fault is not in the stars, but in ourselves”
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