Unnecessary Foreclosures

Thomas Cox has a heartbreaking post at Naked Capitalism about KeyBank foreclosing on a property where they were the second mortgage holder. They likely ended up losing at least $14,000 by doing this. So, not only did a homeowner who had a job and wanted to pay off as much of their mortgages as they could lose their home, but the bank didn’t even have a bottom-line imperative to foreclose.

After spending over $4,000 on foreclosure costs and legal fees, it purchased my client’s interest in the property at its foreclosure sale (there were no other bidders for this worthless second interest) and it did evict this woman from her home at the beginning of October. She is now living in the basement of her daughter’s house. Since the interest in this home that it purchased was still subject to the outstanding first mortgage, it then paid $50,000 to the first mortgage holder so that it could own full title to the property as it made plans to re-sell it. Thus, at this point it had over $54,000 invested in gaining full title to this property. Last week, KeyBank listed this property for sale for $44,000. It will surely net no more than $40,000, if it can sell it at all. This will leave the bank with a real cash loss of over $14,000, a woman living in her daughter’s basement who was willing to pay at least some level on her second mortgage, her community with an empty and devalued property in its midst, and a very sour taste for all of us who try to help these people.

Looking only at this loan and the personal situation of its borrower, KeyBank’s actions make no sense at all. However, along with all of the other major lenders and loan servicers in this foreclosure crisis, it does not look at these loans from a personal perspective. Everything is driven by “the numbers.” Those numbers tell financial institutions like KeyBank that it makes economic sense to avoid the costs of evaluating these loans on an individual basis. The numbers tell them not spend the money to pay employees to make individual decisions on whether a situation such as the one described here makes sense or whether ways can be found to work with the homeowner. KeyBank and the other large financial institutions and loan servicers do not care if they needlessly ruin the lives of some of their customers, as long as they can minimize the expense of dealing with their individual situations. The only “quality and integrity” that these institutions care about is the quality and integrity of their bottom lines.

KeyBank doesn’t pay for employees to look at renegotiating their loans; obviously that costs more than the $14,000 loss they are likely taking here. KeyBank still sees profits in losses that come from unnecessary foreclosures.

Of course, the problem of taking losses on foreclosures and REO sales is only going to get worse, as people stop trusting buying REO sales and the housing market stays flooded with unsold, unoccupied homes.

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