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The recent news about the increasing number of delinquent loans to subprime borrowers is distressing on many levels. We are all asking: How could so many otherwise intelligent investors misunderstand the risk? How could the lenders not understand the risk to their companies when the investors started requiring them to buy back loans that defaulted early? How many of the borrowers were too anxious to buy now rather than later, or buy more than they could afford? How many of the borrowers just kept thinking the next refinance loan was going to get them ahead of the game, instead of further behind? What will happen to the neighborhoods where many of these loans are going to foreclosure?
Out of all this distressing news comes only one good thing — the problem is so big that everyone has the motivation to work together. Servicers have a strong desire to keep a loan current because they must pay the investors the monthly principal and interest payments plus taxes and insurance if the borrower does not. At a recent meeting including servicers and nonprofit housing counselors in New York, one servicer reported that the average loss on a mortgage loan that goes to foreclosure is $62,000. Because of the overwhelming number of defaults, or “foreseeable defaults,” the investors are reducing the legal constraints on servicers’ ability to modify loans and the servicers are working with housing and credit counseling agencies to modify loans to a point affordable to the borrower. In this issue of Cascade we write about servicers’ and counselors’ efforts to minimize the loss and prevent foreclosure. It is hard work, but the results are important.
As you read these articles, there is one recurring theme — borrowers need to seek help early; ignoring the problem will not make it go away. We all need to help borrowers understand that even if they cannot stay in the house, working with the lender to sell the property or provide a deed-in-lieu, leaves both the lender and the borrower in a better position. Losing your home is a humbling experience.
As for the lenders and investors, I end only with a bit of advice, obviously too late for some, from a former boss, “Making a loan is easy; making one that gets paid back is the hard part.”