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Banks delay foreclosures to collect more late fees

Original post made by resident, Barron Park, on Aug 2, 2009

I read an interesting financial article this week in the Orlando Sentinel. I heard some of its points discussed today in the news, but I don't think it's widely known yet. Basically, it says that banks are intentionally delaying many foreclosures to collect more fees often at taxpayer expense (again!). This is sadly not a joke! Delinquency fees are usually 10-15% of mortgage payments and late charges (yes, this is in addition to delinquency fees...go figure) are often 30-40% of mortgage payments. Then, throw on servicing and other fees leading to a grand total of 150-160% of the original mortgage payment being tacked onto the loan. Why would they do this since you might think it does them no good with underwater houses? Let me count the ways...

1. Ultimately, when the home is foreclosed with inflated expenses, the bank gets to write off tons more expense and debt which magically helps them avoid paying even more taxes.
2. Delaying the write-offs allows the bank to maintain fictionally high appraisal values and thus avoid raising more money for capital reserves, avoid freaking out investors and basically avoid going bankrupt.
3. The new government programs pay the banks a percentage of any principal write-down or lowered payment and allow forebearance of a chunk of the loan all while paying annual servicing reward fees. So, banks can pile up the expenses for 6-18 months instead of foreclosing, then get paid a small percent by the government to write those expenses off not to mention the additional tax benefits of write-offs mentioned above (double dipping) and then get paid annually by the government to stall loan problems as the artifically low interest rate rises over 5 years and balloon forebearance payments come due in 15-40 years.

Essentially, the government program fees are not nearly as good as the fees banks can pile on in pre-foreclosure, so banks are trying to get the best of both worlds. They are using our bailout dollars to stay alive while piling up fictional mortgage expenses that will lead to massive tax write-offs which will be additionally tax-funded through government programs. The bank big wigs win either way. If housing recovers or stabilizes (highly unlikely), the slow bleed of foreclosures, write-offs and government programs will allow them to continue to cook their books while milking taxpayer money. If housing tanks, their ultimate tax write-offs will be even greater and they'll get bailed out by taxpayers OR they'll go bankrupt but will have forestalled bankruptcy by a couple years thus raking in millions more in bonuses needed to carry over their mansion payments during the depression.

Comments (1)

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Posted by Benefit
a resident of Meadow Park
on Aug 2, 2009 at 10:26 am

I do not admire the big banks, but doesn't this result in people being allowed to stay in their to-be-foreclosed houses longer without paying the mortgage at (mostly) the banks' expense?

And slow down the correction in property values?

Yes, some tax benefit and subsidy goes to the bank, but postponing foreclosures right now, while there are too many for the market to swallow, sounds like a good thing not a bad thing.

It allows more time for the market to find its way. Too steep a pricing decline driven by too many foreclosures too fast would lead to a kind of stampede, and prices would drop faster and even more than they otherwise would. Which I believe will be reasonably far and reasonably fast. Far enough that earnings, rather than various unearned gains, will afford them (at low mortgage rates). Fast enough that Obama will see it as president.

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