Cosmic Mysteries – The Loan Servicer Decision-Making Process

(What follows is a hypothetical scenario.  It is based upon at least 50 recent interviews with clients involved in distressed housing transactions as well as multiple conversations with local Realtors who have represented sellers trying to get out from under a mortgage they can no longer afford.  The mystery of course, is how and why loan processors make the decisions they do.  – PCQ)

John and Mary Doe applied to ABC Bank to modify their loan.  They paid $425,000 for their home three years ago, borrowing $375,000.  The mortgage had an adjustable rate they could afford at the time – but not today after the interest rate reset a few months ago, and John had to take a lower paying job.   Comparable homes in the neighborhood are now selling for $295,000.  Both John and Mary work, but with three kids, a dog, two cars and a hefty mortgage payment, their budget is stretched to the breaking point.   Today, their mortgage balance is $350,000.

ABC Bank works with them for several months, but the best it will do is reduce their interest rate and their monthly payments for six months, and tack the deferred payments and interest to the principal balance of the loan, together with late fees, penalties, etc.

John and Mary ask the Bank to forgive $50,000 of the principal indebtedness and recast the loan balance at a fixed rate that would fully amortize the $300,000 loan over the remaining term – payments they can comfortably afford.   The Bank won’t budge, saying that they will not forgive any principal – it all has to be paid back, either now or later.  John and Mary give up, stop making their mortgage payments and wait for the inevitable foreclosure.

ABC Bank obliges John and Mary.  It forecloses their home, puts it into their already bloated REO department, and lists it for sale.  The Bank’s listing price for the home is now $325,000.  The best offer it receives is $275,000, from an investor, who plans on renting it out.   ABC Bank accepts the offer seven months after foreclosing John and Mary.

Riddle me this….

Why would ABC Bank prefer to sell the home to a non-occupying investor for $275,000 rather than reduce the principal for John and Mary to $300,000, who would continue to live there?   How has the Bank advanced its financial position?  How has this helped preserve a neighborhood for homeownership?  How has ABC Bank helped John and Mary, who now have a foreclosure on their credit record, are renting a smaller home, and have no prospects for buying another home for the next several years?