The Trouble With Workouts

Oct 5th, 2007 @ 7:57 AM by Alden Smith

A lot of people are wondering why mortgage lenders are reluctant to do workouts for people on the verge of foreclosure. I have reported on Countrywide Financial Corporation, and their efforts to do workouts for this segment of the population. Let’s look at a little background information first.

What’s A Workout?

Any workout agreement is a last-ditch effort by you and your lender to avoid foreclosure and keep you in your home. Mortgage lenders do not want to see you in foreclosure. This situation means to them that they need to consider whether or not to cut their losses or work with someone showing inability to pay. Mortgage lenders are not happy to be in this situation for obvious reasons. The workout may be an oral or written agreement between you and the lender that lists the steps to be taken to prevent foreclosure. It must be based on realistic estimates of your ability to pay. Usually, the workout plan depends on how seriously you are in default. It considers your financial problems short term, in the foreseeable future, and your prospects of finding funds to catch you up. It also considers the value of your property.

If it appears that you can bail yourself out within 30 to 60 days, a lender may grant you temporary indulgence. This is generally done when a house has been sold but the transaction hasn’t been settled. The lender will need to see documented evidence, such as a sales contract, before they will grant indulgence.

How Do Lenders View Workouts?

There is a lot of interest presently in seeing that workouts are easily rendered by mortgage lenders. California Governor Arnold Schwarzenegger and President Bush have joined housing advocacy groups in pressing lenders to be flexible. It makes good economic sense to see people staying in their homes and not forced out by foreclosure. Advocacy groups such as nonprofit counseling group NeighborWorks are making a lot of noise, and are being heard. So why are lenders reluctant?

It is both an issue of logistics and the fact that mortgage lenders are unwilling to bail out people who have made poor financial decisions. That is understandable, and I do not feel the government is responsible for people making wrong decisions. But the logistics of the problem is probably more interesting. We have discussed how mortgages are packaged and sold to investors worldwide. Lenders like Countrywide sell most of their loans and can’t modify many of them without permission from the investors. And if loans are packaged and sold to investors all over the world, the simple act of getting permission to modify loans becomes a nightmare. And in that we have the root cause of the problem.