Monday, December 12, 2005

Why Am I Always the Last to Know?

Daniel Gross writes in Slate that banks are "afraid" to foreclose on customers -- even if homeowners are way behind on their mortgage payments and up to their necks in debt. The reason? They don't want to spend the money, and they don't want people to think they're meanies.

The delinquency rate for subprime borrowers would seem to set the stage for a huge rush of foreclosures. But the big lenders have plenty of (mostly short-term) reasons and incentives to avoid taking back the houses of their nonpaying customers. And they're doing everything they can to keep their customers in their homes -- even if they're not paying the mortgage on time.
Aside from damaging a bank's balance sheet, getting aggressive on foreclosure can damage a lender's reputation. It's one thing for a credit card company to refuse to boost a credit limit. It's quite another thing to kick somebody out of their home. Doing so is a PR nightmare and an invitation for greater regulatory oversight.

More broadly, though, the hesitancy to foreclose says something about the evolution of the lending industry. Today, when people fall behind on their debts, the industry views it as an opportunity for new business. Mortgage brokers and lenders continually encourage strapped borrowers to roll over their mortgage into a product that allows them to reduce payments but still "remain current." And there have never been more options available -- teaser rates, interest-only loans, even so-called negative amortization rates, where borrowers don't even pay the full monthly interest.

All of which means the housing boom is being fueled by the willingness of lenders to let borrowers get behind -- and stay behind -- on their payments. Homeowners go deeper and deeper in debt and become less and less home "owners," but they get to keep the roof over their heads. It used to be that only gigantic banks and corporations like Citigroup and Chrysler were regarded as too big to fail. Today, the humble homeowner enjoys that status as well.

Really. Well, someone must have forgotten to let Litton Loan in on this hot societal trend. Because here I am sitting in a small two-bedroom apartment, and there's another family living in the house that used to be mine.

Not that I'm complaining. I love this apartment, my rent is almost half what my mortgage payment was, I have a great landlady, and I got to keep all my animals. But Litton and I were well into the foreclosure dance, and if I hadn't sold the house, they would have kicked me out.

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