I was out with a bunch or Realtors today learning tons of great stuff about the Scottsdale Unified School District (“Most Excelling School District in Arizona”) with the Scottsdale Area Association of Realtors’ Leadership Academy.
I spoke with a few Realtors about the banks. I’m very curious to know why banks don’t modified more loans. My guess is that banks would lose a lot less money, if they modified more and foreclosed less.
Inertia
Bureaucratic inertia is one big reason.
“Banks create idiot-proof systems and then hire idiots at $12 per hour.”
I guess that is one economic model.
The banks have a certain way they do business and they haven’t adapted to the real estate bust.
For example, the department in the bank that forecloses on homes does not communicate well with the department that approves short sales. It’s not the “foreclosure” department’s job to suggest reworking loans or to encourage short sales.
Apparently, there are tons of cases where the banks would lose a lot less money if they simply renegotiated the loan.
Intimidation
One gentleman mentioned how his first job was as a loss mitigation specialist with a mortgage company. Back in the day, he would call up borrowers who were getting behind and try to figure out a way to fix things in a very cooperative manner.
Now, he says when the banks first talk to borrowers who are delinquent, the banks intimidate the heck out of the borrowers with stories about the Armageddon that will follow if they don’t make their payments. After that, the borrowers won’t communicate with the banks anymore.
Bailout Bad
My impression is that this bureaucratic rigidity is another reason why the government shouldn’t bailout the banks.
A bailout will just let the banks continue with business as usual instead of letting the market force the banks to develop new systems that minimize the losses from bad loans.
And if the private sector bank bureaucracy is that inefficient and inept, I can’t imagine how inefficient and inept the government bureaucracy will be after they buy hundreds of billions of dollars of the worst home loans.
The banks can save more money by developing more efficient systems to handle loan modifications, short sales and foreclosures. If the banks get a federal bailout, they won’t have as much pressure to develop those cost saving systems.