(This post is written in a particularly cynical tone. If you don’t like it, be glad that I’m not giving you something much, much worse.)
In today’s loan market, legitimate borrowers who deserve a loan modification are finding it harder and harder to get modifications approved. Let’s take a moment to explore why.
Banks are a lot like the government. They have a lot of regulations and a lot of rules in place. The vast majority of bankers have never even read the rules about what they can or can’t do.
In such situations, the banker’s decisions usually come down to money and job security. What will make the banker the most money? What will keep the banker in the same position making money for the longest?
In the past (“Before the Bubble,” or B.B.), this was done by extending as many loans as possible to as many people as possible. The banker received a percentage of each loan (either for the banker directly or for the bank). As a result, lenders did not screen all of their potential buyers, and some borrowers would just refinance every few years to keep their loan going in perpetuity. Bankers would modify loans very quickly just to get their percentage, and were not careful about separating the legitimate loan modifications from those who improperly used the equity in their home as a debit card, a/k/a borrowing from Peter to pay Paul.
Now (“After the Crash,” or A.C.), bankers are much more limited in what they can do. Many people who sought loan modifications in the past are defaulting on their loans now. There are more regulations and new policies in place now than ever before. Not only do they no longer get bonuses for making as many loans as they can, they are at risk of losing their jobs if the loans default.
This makes life very difficult for all of you who legitimately deserve a loan modification. Bankers are afraid of losing the bank’s money, and they know they will face severe consequences if they do. For this reason, it is often safer for them to just deny a loan than to make one with a risk of default, however slight. Even if they have nine successful loans, the tenth one that fails is the one that will get the attention of the shareholders.
There is a silver lining to this cloud, however. Bankers will sometimes wait before moving to foreclose on property. If they foreclose and the bank loses lots of money, the banker has to report to the shareholders. The shareholders may respond by getting a new banker. For this reason, there may be more time to work with the bank than you might expect.
