pig-headed banking

A home enters foreclosure every 13 seconds in the United States. The forecast is that an additional six million homes are at risk of foreclosure before our little crisis ends. Now put yourself in the seat of the Senior Vice President (or Assistant Deputy Manager in the real world) of Mortgage Collections at Citibank or Wells Fargo or whatever. Besides feeling good that you made several hundred fools who bought beyond their means whimper, what have you accomplished?

As I understand it, most foreclosed homes (in today's reality at least) have two things in common. Their house is now worth less than the mortgage (underwater); and the original mortgage, which was negotiated in "good" times, had an sub-prime adjustable rate, which the homeowner could pay, but the rates have now "adjusted" beyond their means.

So what happens to the Senior VP's portfolio? While he has eliminated several hundred late or defaulted mortgages (which looks good), here's the not-so-good:

• Value of the portfolio has dropped (since assets now have a lower value due to change in ownership & underwaterness)
• Bank now has even more unsellable (empty, dilapidated) property on its books (they own the homes)
• Cash flow has been reduced (mortgages are now not being paid)
• Expenses have gone up (legal and real estate fees for changing ownership)
• Customer satisfaction has gone down (more people hate them)

This doesn't bode well for this bank, banks in general, and the industry as a whole. To add salt, vinegar and Tabasco to the open wound, the customer has to find a new (and clearly cheaper) place to live; their kids may have to change schools; and the whole family is in an ultra-stressful situation, which could result in medical issues, etc. There is also the ripple effect - as more homes are abandoned, real estate prices have fallen, and now even people that did not purchase sub-prime loans are affected and unable to maintain their mortgages, and of course the community's economy starts to depress.

Now I'm not saying the customer is without blame, they bought beyond their means, certainly didn't understand the terms and conditions of their mortgage, and may in some Darwinian sense deserve their fate.

But still - how is the bank benefited by doing this? How is the local economy benefited from this? And by the way - how often has the US Government bought beyond its means? How often has the US Government not understood the "terms and conditions" in say an international trade or foreign policy scenario? These are the patterns and behaviors the citizens are following...

The net result of any foreclosure (in good or bad times) is that both sides lose. The only possible winner in a foreclosure is a cash-rich bargain hunter up homes at ultra-low prices and waiting to sell them when times improve.

A while back, I wrote about the lending crisis and proposed a government-driven solution that would buy up depressed assets and negotiate better terms for the homeowner. In retrospect, I think a better answer is for the banks to do it themselves.

But why aren't banks helping themselves by proactively renegotiating mortgages, keeping the asset intact, and maintaining their cash flow? Surely no-one can argue that it's better to cut off their noses to spite their faces? Why not have a simple escalation process that reaches out to homeowners and helps them stay in their homes and keep paying their mortgages, albeit at lower rates?

Am I missing something?

P.S. Apologies to any pigs I might have offended.