Loan Guidelines May Not Always Make Sense

Many people are having difficulty with their home loans these days.  Some homeowners are attempting to obtain “loan modifications” that will allow them to repay their loans on terms which will allow them to stay in their homes.  For example, a homeowner with a loan term of 30 years may seek to extend their loan term to 40 years.   Such a modification could have the effect of lowering a homeowner’s monthly payment by extending the term of the repayment.  Other homeowners may be seeking to lower their interest rates, either permanently or temporarily.  Others may be seeking to have the principal amount of their loan reduced.

These efforts have met with mixed success.  Some homeowners actually have succeeded in having their loan balances reduced down to market value.  But these situations seem to be the exception.  Far more homeowners seem to have been able to obtain a reduction in their interest rate.  Lenders are understandably hesitant to reduce loan balances. And some homeowners seem to be unable to obtain any kind of modification at all.

Sometimes it can seem like a lender’s refusal to modify a loan makes no sense.  But in reality, many lenders are faced with the prospect of holding a large number of loans where the homes are worth less than the mortgage loan balances.  Borrower’s situations can be unique, and lenders may find it difficult to commit the resources that would be necessary to effectively process and negotiate each loan modification request in a way that makes the most sense for both the lender and borrower.  In an effort to process large numbers of loan modification requests, the lenders may find it necessary to adopt rather inflexible guidelines, and these guidelines may not always lead to results that yield the most sense for the borrower and the lender.

For example, some homeowners may want to stay in their homes even though their home is worth less than the amount of their loan.  But these same homeowners may find that their lenders claim that a borrower makes too much – or too little – money to meet the lender’s criteria for a loan modification.  If the lender refuses to reduce the loan balance, and also refuses to reduce the interest rate, then the borrower may find it necessary to foreclose or short sell their property.  In a short sale situation, the best result that the lender can hope for is to receive market value for the property.  But market value may be far less than the loan balance.  If the lender approves a short sale, then the lender will receive less than the loan balance.  Borrowers can wonder why the lender won’t simply reduce the loan balance to fair market value.  It seems like it would make sense for the lenders to reduce loan balances to market value because the lenders only receive market value if the property is sold through foreclosure or short sale.  But even though it might make sense in some situations, lenders seem to be hesitant to reduce most loan balances to the market value of the property.

The most sensible and logical result may not always be the most available result.  In some ways, this is similar to my daughter’s driving situation.  Some time ago my daughter received a commercial driver’s license.  She planned to drive a fifty passenger motor coach bus one summer.  This is a bus that is forty or forty-five feet long, and weights thirteen tons.  This bus has 8 wheels, and each wheel is nearly as tall as I am.  It’s a formidable vehicle.  After extensive training, she finally received a state-approved commercial driver’s license that allowed her to drive such a vehicle on any road, highway or freeway in the United States.   Her license was granted to her because she demonstrated that she possesses the necessary skill, training and expertise to safely and properly operate such an enormous vehicle on public roads.  Presumably the Department of Motor Vehicles and the State believes she also possesses the necessary judgment and maturity to operate such a vehicle.

At the same time, my daughter was unable to operate a rented two-door subcompact economy car that seats four or five passengers.  Why was that?  Because she was less than 25 years old.  And due to some car rental company guidelines, she was presumed to lack the sufficient skill, training, judgment and maturity to safely and responsibly operate such a vehicle.  I find it interesting that on the one hand she was fully and legally qualified to safeguard and protect the well-being of 50 passengers, plus herself, plus untold motorists and pedestrians while she operated one of the largest vehicles on the road, but at the same time she was deemed to lack the necessary skill, maturity and expertise to responsibly operate a rented subcompact two-door coupe.  These two perspectives on my daughter’s ability are completely inconsistent, and yet they exist.  On one hand, this makes no sense.  But the reality is that she is subject to car rental guidelines which have been prepared for addressing a large number of potential car renters, and these guidelines aren’t specifically tailored to individual situations.   In other words, guidelines don’t have to make sense in a given situation – they just have to be what they are.

Copyright 2017 ROBERT B. JACOBS