Where I depart from analyst, I don’t think it’s the government’s fault or kicking the can down the road or anything to do with responsibility. It’s just a business decision on the lenders part, one that has more upsides in some situations than a repo for them. The guy will stay, keep up the place, make a payment (albeit a smaller one) and he will feel good about it, even brag about it. In time, they have a decent chance of getting all of their money back. You can envy that guy, i feel bad for him a little, if his value returns in the future, he won’t get the benefit of it that his neighbors will (like a renter), but then again, his other option is be kicked out and to rent for probably a similar price and this way he doesn’t have a landlord. Don’t do a loan mod as a strategy, do it if it is your last resort.[/quote]
I agree that the lenders may be doing what’s logical given the rules as recently amended. What many are failing to acknowledge is that, until recent changes, the rules did not allow the lenders that choice. And the rule change was forced upon the Financial Accounting Standards Board by the federal government (Congress threatening to legislate FASB into irrelevance).
Until mark-to-market was suspended, the lender was required to value its loans at market value, not face value. For government-insured institutions (all the traditional banks, and the investment banks which changed their status to get government help to avoid going under), the markdowns of loan values to market would have lowered the asset side of the balance sheet, and, therefore, equity/capital, to a level that REQUIRED regulatory takeover and liquidation. The lender would cease to exist, therefore not making any business decisions, good or bad.
Whoever bought the marked-down loans during the liquidation process would then have the choice of foreclosing on them, or going into the business of lending to borrowers in distress. The attractiveness of either course would be determined by the price paid relative to the predicted recovery value. It would be pure speculation to guess which path might be taken in any given case. There would probably be some of both, since new corporations would be created to replace the ones whose irresponsibility led to their own destruction.
