Let me explain. The major banks hold trillions of dollars worth of residential mortgages. These include mortgages already in foreclosure as well as increasing numbers of non-performing loans (loans on which payments aren't being made), which are a conundrum for the banks.
If a bank forecloses on a home or agrees to a short sale (sale at a price too low for the bank to recoup the entire loan balance), it loses money in more ways than one. Obviously, the bank doesn't recoup the full amount of the loan, but the larger loss may be the decrease in the values of the current mortgages it holds on homes in the vicinity of the foreclosed property.
This is why. When a house is either sold or foreclosed, the price of the transaction becomes a matter of public record. Appraisers use it as a comp (comparable property) when they appraise other homes in the area, so those homes get lower appraisals. As more and more homes are appraised for mortgage or property tax purposes, each appraisal reflects the low appraisals of the others. The ultimate result is a devaluation of all the homes in the area.
Some banks are beginning to realize the negative effect of foreclosure on their current mortgages, which is making them less anxious to foreclose and more willing to work with borrowers to find mutually beneficial solutions.
Unemployment, which a bank is unable to do anything about, is the main reason people aren't paying their home loan bills. So what should the bank do? If a borrower stops making payments on a loan, the bank has to set aside additional reserves to prepare for the upcoming loss. If the bank forecloses or agrees to a short sale, the loss eats into the bank's reserves and, as I explained, the foreclosure or short sale lowers the value of other properties in the area.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.