Foreclosures are often in bank’s best interest.

Yep, you read that right. While many, this blog writer included, are inclined to believe that foreclosure is disadvantageous for the bank, experts suggest that it’s the bank’s best option to deny loan modification and proceed with foreclosure. In several scenarios at least.

There is one type of situation where everyone seems to agree that loan modification is in the bank’s best interest. If the borrower can't sustain the present payments, either because the principle is too high or the interest is, but can make the modified payments.

In the case of a borrower who can’t make the modified payments under any circumstances, it makes sense for the bank to deny loan modification. But, in two other types of cases, there is no obvious answer, although data appears to suggest which way the bank wants to go.

There are borrowers who can catch up on their payments, but at great financial sacrifice, such as using the overwhelming majority of their monthly income to make the mortgage payment, what is sometimes referred to as “house poor”. In other words, bag your lunch, don’t take vacations and hope that there is no medical illness or unexpected event in your life. The quality of life may be lower and the lever of anxiety may be higher for these borrowers, but the bank has little financial incentive to help them.

The second subcategory of borrowers are those who can catch up, but will take a long time in doing so. Unlike the above example, where the borrower can make immediate changes and have the ability to pay, these borrowers may be able to cure over time. Whether it’s the uncertainty or the need to have it happen now, banks don’t appear interested in helping these borrowers.

The bottom line is that there will be no help to a foreclosure situation without at least some self-help from the borrower. The statistics show that a successful loan modification depends on convincing that bank that you can pay the modified amount, but that you cannot pay the present amount under any circumstances.