In the previous post, we saw that second mortgage holder Bank of America was willing to take nothing now, and allow the first lender to foreclose – rather than accept $10,000. Let’s examine the possible reasons why this happened.
1. Banks are stupid – a crass generalization that deserves more depth.
You could speculate that banks/servicers are making faulty policy decisions, but usually where I see ‘stupid’ decisions are from those clerks on the front lines – people who are buried with files and aren’t able to make quick decisions accurately. Some are buried with files and can handle it, others can’t, and if this B of A decision was a mistake, oh well, it’ll probably be absorbed. B of A was the actual lender, not just servicer – on the tax rolls they were the bank that funded the loan, and was the decision-maker, according to the LA.
2. Banks are backstopped by U.S. Government
You could imagine a few conspiracy theories here – that B of A might have some sort of incentive to lose money, but because will have to wait for the book/movie to expose it, we’ll be a little short on specifics today. Let’s add, this wasn’t a Countrywide deal, Bank of America was the lender of record in November, 2007 when this $100,000 second mortgage was funded on top of a $900,000 first mortgage that Empire Mortgage Co. had funded in March 2006 (and likely sold off by now?).
3. B of A has recourse, and will pursue borrower.
Irene mentioned in the previous comments that lenders will have recourse for the duration, and I don’t see them waiving it for short sales – especially on seconds. Let’s be clear about one critical component – there are no reminders to borrowers coming from the realtors about future recourse. NAR, CAR and the local realtor boards have done very little to instruct realtors about the possible future liability of recourse loans. As a result, everyone is just pushing to close a deal, and not many folks are demanding that the lenders waive their recourse. I appreciate any views from the attorneys here, and thanks CA Law for bringing it up.
4. Banks are having a change of heart about their “gentleman’s agreement”.
Rob Dawg mentioned it early on that the big lenders/servicers will likely play nice when it comes to settling these disputes between first and second lenders, because on the next deal the shoe will be on the other foot. Most cases over the last few months have had the first mortgage holder paying the second $5,000 to $10,000 to go away nicely, and this is why the listing agent was mad – it didn’t happen in this case.
Possibility #4 is one we will be following closely, because I don’t expect that a major lender is going to make a statement on CNBC that they are waging all-out war in their race to the exits. It will only be seen by examining individual cases and stringing together a series of events to learn what the lenders/servicers are thinking.
I’m pretty sure about this – they will be firing all their guns at once in 2010, and it may not be that obvious to the casual observers. We’re expecting more NODs to make it to the auction list, more trustee sales executed instead of postponed, and the REO listings to increase slow but steady, all while the powers-that-be are frantically pushing loan mod programs that may look and sound good, but aren’t resolving anything.