...figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.My interpretation is that the rich would rather tear the system down than give the poor a break. If the dispute were purely over money, then it would be irrational not to do loan modification. But it is an issue of power and status. The rich loan, the poor pay. You don't let the poor "negotiate" what they can afford. That upsets the social system. It gives power to the poor. Rathen than negotiate, the rich would rather tear down the social structure.
Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.
Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.
Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”
It is exactly this kind of "logic" that causes wars and revolutions. Think of the Civil War. The US South would have been far more rational to convert from a slave system to a sharecropper system (with Jim Crow laws) which would have kept the whites socially on top of the blacks and continue to economically exploit them. Instead, the South chose a civil war, and Based on 1860 census figures, 8% of all white males aged 13 to 43 died in the war, including 6% in the North and an extraordinary 18% in the South (from Wikipedia). On top of that, the infrastructure of the South was destroyed. Rational people don't choose this. This was a war because the elite in the South didn't want to give up their power and couldn't see that a shift to a "free" sharecropper system with Jiim Crow laws would essentially keep the status quo while giving the blacks the legal figment of "equality". Similarly, the banks (and the rich and powerful behind them) can't see their way to "loan modification". Instead they are choosing ruinous foreclosures despite the real costs being 100 times that of foreclosure.
My explanation is based on a critique of social relations. The "official" explanation is stated purely in terms of monetary factors:
- More than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted. Lenders are so eager to not "lose" these self curing borrowers, they are willing to drive large numbers into foreclosure and not negotiate loan modificaiton.
- A large fraction of borrowers who receive modifications end up back in serious delinquency within six months. For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure
- If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.
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