For the past couple weeks I've been reading in the rain how bad these banks have it and how 50% of all the loan modifications they did in 2007 are now in default again. Oh, the poor me syndrome, "Please help us, throw us money, this is why we shouldn't have to do loan modifications, congress."
Well, let me be the optimist here and go the other way and help congress with some math that may have been missed in this equation.
Let's say that there were only 1 million loan modifications in 2007. (I know this is low, but I wanted to keep the math simple.)
Since most of these loan modifications were done in the first 5 years of the loan that means 90% of the money paid each month was interest. (We are going to go with an average monthly payment of $2,000 per month.)
So, out of that $2,000, the bank receives $1,800 in interest and $200 toward principle. (I would love to have a rental property that made me $1,600 a month.)
Now, let us assume it took a year before this 50% started defaulting again. That means after 1 year, on those one million loan modifications, they made $1.8 billion in profit from those million loan modifications and continue to make $900 million annually from the ones that are still paying.
Now, what would have happened if they had foreclosed on all these properties and had to sell them at auction where they get only $.60 on the dollar? At an average home price of $250,000 and selling at $150,000 at auction, they would have a net loss of 100,000,000,000 billion dollars.
Wow, so if we take all those loans and modify them, rather than foreclose on them, does that mean we wouldn't have to be putting these homes on the market at a discounted rate, making property values go down?
Yep, that is what I'm saying congress. Who cares if 50% still go in to default, let them sell it on a short sale and let the banks be happy with the extra $900 million they made during that year the clients were paying.
So, let us multiply that by 10 and, guess what congress, you don't have to give these banks a dime and their money problems are fixed and they can start lending again.
Todd Clark - broker
Kastings & Associates