There are many issues that a lender has to deal with when making a decision to foreclose on a homeowner. One thing that becomes a big issue when making this decision for a lender is mortgage insurance. If the home owners are paying PMI (private mortgage insurance), the lender stands to lose much less with going through with the foreclosure. This insurance makes up a portion of the loss to the lender. Because of this insurance, the lender’s motivation to work out a deal with the homeowner via loan modification and keep them in their home is diminished by the mortgage insurance. Because working out a deal could mean less money in their pocket.
These lenders make the loans, and then are insured to help cover any loss. The great thing about it (for them) is that they don’t have to pay for the insurance, you the homeowner do. This insurance however is a necessary evil. If this insurance was not available, you would be required to have a 20% down payment. So with this insurance lenders were able to take additional risks. That has led us to the mess that we are currently in.
When homeowners began losing their homes by the thousands the insurance companies who insured these loans could not keep up. They were unable to pay out all of these claims. Companies like AIG insured lenders and were so big that allowing them to go bankrupt was not an option, that would have led to many bank closings as well. So they received a bailout from our tax dollars and were allowed to keep operating, with “help” from our government.
Our Federal Government is also an “insurer” of these “toxic” loans as well. They are also a big player in this game. They are probably the biggest recipient of these deals gone bad. They are trying to pull out all the stops as well in keeping people in their homes by subsidizing lenders to do loan modifications. They also will lose more money if homes are foreclosed on. This is not big brother doing this out of the kindness of their heart; they are looking out for number 1 - to avoid paying out on the insurance.
What should have happened looking back? What could we have done to avoid such a mess? The floor is yours -
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