An interesting article from DS News, a leading Default Services Magazine – Even though working out loans is more profitable for the lender than foreclosing, why are foreclosures taking place at an accelerated pace? As we seek answers to the housing problems, the answer was right in front of us. Did this have to happen and did we have to watch home values continue to decline as additional foreclosure inventory drives our home values even lower? The answer is “NO”!
The economics and practicality of the loan workout processes demonstrates an earning asset is worth more than a non-earning asset and therefore, a loan modification can be more profitable than a foreclosure.
There are several reasons for the failure of loan workouts, from the borrowers all the way up to the investors. Often times, a loan workout can’t even be discussed until the borrower is 3 months past due to qualify for most workout options.
I have attached the comparison from the article and my own graph, outlining the cash flow to the lender, for each workout option, based on a $200,000 loan in default.