The Truth Behind Bank Negotiating Struggles

Through the changes that have occurred in the economy and Real Estate environment over the last few years, Short Sales and Loan Modifications have become a big issue ... and quite a struggle. There sometimes seems to be little or no logic behind the decisions of bank officials and their guidelines. There are countless unfortunate situations where a bank may not approve a short sale at $300,000, yet they will instead allow the property to foreclose. After which the same property that had someone willing to buy it for $300,000 ends up selling for $250,000 after foreclosure. An additional $50,000 loss in this example. There are many other similar examples happening every day such as loan modifications being made with only a very slight change in interest rate, only temporary, or denied altogether only to let the property end up back in the hands of the bank to sell. It sometimes may seem like the banks are trying to destroy themselves. These situations continue to frustrate homeowners, sellers, buyers, would be homeowners, and of course Real Estate agents and brokers.
What is behind all this madness? Why do the largest institutions in the country seem so illogical and ridiculous? Are they really that bad at business to not realize how to cut their losses when given the chance? The answer to all of these questions is: It's not that simple (although perhaps in some cases the answer is just Yes). If it were only that simple that a bank could make a decision all on its own to change the terms of the original mortgage note that was given, or to give an approval on a short sale that would net them more than they would receive if they foreclosed on the house. If only our financial system and products were that simple. If only. Our financial system has become so overwhelmed with "creativity" that nothing is simple anymore. There are a few main reasons behind the madness that may shed some light.
Reason #1: Very few single entities or single owners own a single loan or mortgage by itself.
Why? CDO's. Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs are assigned different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. -- From Wikipedia
In many cases, there is no single person or company to turn to for a decision to accept or approve a modification of any terms of the original agreement. Loans are given by one company sold to another then bundled together with hundreds of other loans of different types and sold like a giant layered cheesecake mutual fund to many different investors (other firms, hedge funds, China -there's a whole other story, etc.) and serviced by some other firm. By the time a loan is made and it completes its journey through wall street re-packaging and ends up at adulthood with all of the other loans in the giant layered cheesecake no one knows who owns what slice of the cake or how much it's worth.
Reason#2: "Not my Job" -- Anonymous wise man who has been sued before.
Because of reason #1, there are different companies that are given the job of servicing the loans. It is their job as the servicer to collect payments. That is their job. Not to negotiate deals for something that they do not own. Granted, most servicers do have set guidelines in their contracts that will allow them to make certain changes under certain circumstances. The bottom line is, it's just not their job.
Reason #3" Legality.
Let's face it, we live in a legal world and a litigious society. When loans are made, sold, packaged and re-sold, they are sold as a product with explicit terms. If these terms are later changed after the product has been sold, is it still the same product? No of course not. If you bought Ferrari and a week later a mechanic showed up at your house and replaced the engine with a Briggs and Stratton, I assure you that you would be upset. You call up the dealer that sold you the Ferrari that now only goes downhill and listen as he explained that "well, those Ferrari engines have become quite fickle and decided not to work anymore, but they will work if we just make a few minor changes and modify them into Briggs and Stratton. Hey how about that, we saved your car!" Obviously you are not amused and you call your attorney. Loans are no different. They are sold as a product based on the terms of the note. Institutions must do their job to service these loans as they agreed when they sold them or they will be in breach of contract. Obviously the product (CDO) was a flawed creation and is no longer a working or functioning product.
Furthermore, it is the fiduciary duty and responsibility of the corporate officers of these institutions to do what is best for the shareholders of the corporation. It is not their duty to do what is best for the consumer. Only the shareholders. If they did otherwise, they would be acting in bad faith to the people who are entrusting them with their investments. This is why government intervention in the private sector is definitely a gray area to be in. Not to mention a conflict of interests between the institutions and the consumers that owe them money.
So next time you wonder why you can't get a deal done although it seems perfectly reasonable, and the person on the other end of the phone seems completely unreasonable and illogical, just remember, it's not their job.



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