Dalrymple: Ask a Banker
August 24, 2016
I've often wondered: why are lenders so concerned about the borrower when they have a mortgage on the property, and , if the borrower doesn't pay, can take the house and make a chunk of money when it's sold?
This could be the oldest, and certainly the most erroneous, myth in lending and finance. Cheops probably needed some cash to conquer some neighbor, and pledged the pyramids to a money lender from Phoenicia. He conveniently forgot about the debt, and the poor lender was scratching his head, wondering who would ever want those piles of rock.
Back in the last century, Johnny Cash and Bob Dylan did a duet, with the refrain, "There ain't no good chain gang".
There ain't no good foreclosure either, at least not from the standpoint of the lender. Not ever.
Seems kind of counter-intuitive, doesn't it? Say that the property sells for $200,000, and the borrower puts thirty percent down to buy it. That's a $60,000 cushion for the lender, right? So, the borrower defaults, and foreclosure starts. At that point, it's very likely that the $200,000 house isn't worth anywhere near that figure.
And, if it gets to the point where the lender is the successful bidder at the foreclosure sale, then it's dead certain that there's a loss on the loan, and probably a big one. It takes months for a foreclosure action to be completed. During that time, the borrower owns the property and can sell it to cover the debt and make a profit, if there's one to be made. If no buyer has stepped up, that seventy percent loan to value ratio loan is above 100 percent LTV, and probably more.
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By this time, that dream home has probably been trashed, so on top of attorney fees and other costs, the lender has to put even more money into the dead horse to bring it back to some semblance of life.
And then the real pain starts. I once worked for a very wise man who counseled me that, "The loss that you book on a foreclosed asset, between the loan amount, and what you actually sell it for, is just the tip of the iceberg. The major loss is in time and lost opportunity". Meaning that every minute spent on managing a bad asset, a foreclosed home, is a minute that the lender can't spend making money in its primary business line.
Lenders aren't real estate investors or developers. Their business is lending and every dollar that's tied up in foreclosed real estate is a dead dollar. The last thing that a lender wants is a borrower's house.
This is just the business downside of defaulted loans. If your business happens to be a bank, with insured deposits, then you have the bank regulators piling on. If a bank is deemed to have an excess of REO (Real Estate Owned) then the regulators hit the bank with a plethora of penalties and restrictions which make it almost impossible to do business at much of a profit.
I've been in the real estate lending business for over half a century. I have yet to see a good foreclosure.
How do I know all this? I thought you'd never ask. I am a proud graduate of the best, but most expensive, college on the planet: the U of E; the University of Experience.
Pat Dalrymple is a former bank president who has been making mortgage loans in western Colorado since 1967. He's currently an advisor to Grand Mountain Bank's Mortgage Lending Outreach Initiative. He welcomes your questions on lending and banking, and can be reached at firstname.lastname@example.org.
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