In fear of the growing level of defaults and more importantly the fear of future defaults, several banks across America are putting together a default task force. These task forces have been aptly named the Mortgage Mod Squad, after the hit TV show in the 1960’s. This is one of many signs that danger lies ahead in the mortgage market.
What are Banks and Mortgage Companies Worried About?
Interestingly enough, these firms are more worried about the perception of a soft mortgage market then the actual default level. While many people may disagree with this, the biggest market mover is investor sentiment and investor confidence. If the default level continues to rise, the unwarranted fear in the subprime lending market will continue to grow.
Additionally, banks and mortgage companies do not want to be in the property business. Most consumers don’t realize it, but these companies would prefer not to foreclose on properties. From a bank’s perspective, when they take over a property they have to pay all of the taxes and upkeep, additional holding cost, and the cost of selling the property (at a discount). Instead of realizing the loan value plus some interest percentage, the bank ends up receiving at best, 80 cents on the dollar.
How does this Affect Consumers and Borrowers?
This is a very positive sign for borrowers. First, borrowers who are falling behind in their payments or have experienced a rate reset that they cannot pay have some recourse. More than any other time, banks will now be open to negotiating payments, providing a low interest workout loan, or simply deferring payments. While borrowers still need to be proactive, banks are taking an aggressive stand to avoid increasing the level of default at this time.
Consumers, however, may not be so fortunate in this situation. People who are searching for houses now can expect higher interest rates and more scrutiny of their credit history and financial means. Those of you with no credit or with a few blemishes on your credit record will experience a much tougher loan process. In some cases even people that have been prequalified for loans may have their statement retracted. While it is important to understand this situation, consumers should not panic. If you get turned down for loans now, consider waiting a year (or two), saving up, repairing your credit history, and then trying again.
Mortgage companies and banks are trying to head off investor panic in the mortgage markets by reducing the rising default level. Take advantage of this if you are already a borrower. If you are not, expect the process to be tougher than it has been in years.