According to this Mish's Global Economic Trend Analysis article, Government and Lender Policies of Fear and Shame Help Keep Homeowners Debt Slaves, lenders offer loan modifications to financially distressed homeowners only if doing so financially benefits the lender (i.e. it as a business decision), while homeowners view walking away from their homes as a moral decision. The article concludes that the result of these differing view points is that homeowners are at a distinct disadvantage compared to mortgage lenders when trying to make sound financial decisions regarding their homes. Without going into all the details described in the article (if you would like all the details, I highly recommend that you read it), I would like to mention the following points made in the article.
- Homeowners heavily factor in personal responsibility and morality into their decision to keep paying their mortgages even though they are financially struggling and/or may owe more than their homes are worth (although this view is changing somewhat - see my blog post Underwater Homeowners Walking Away From Their Homes).
- Lenders are more responsible than homeowners for the real estate boom and bust due to lenders' superior real estate market knowledge including appraisals to determine property/collateral values, complex default models, deciding to require lower down payments even though the lenders knew that higher loan to value mortgage loans had higher default rates, etc.
- Due to lenders being more than 50% responsible for the housing bust, lenders should be willing to voluntarily write off some of the debt in order to reduce the amount that homeowners are underwater (i.e. negative equity), but they are not doing this since when lenders are trying to decide on how to best handle struggling homeowners, they do not factor in "responsibility" for the housing market crash. Instead, lenders strictly desire an outcome that will maximize profits or minimize losses.
- Due to the difference in the way that homeowners and lenders view mortgage loan default (personal responsibility/morality versus business decision), mortgage lenders are able to manipulate homeowners to do things that are to the financial benefit of mortgage lenders, but to the financial detriment of homeowners.
The information above is why:
- Lenders take as long as they want to respond to homeowner loan modification requests.
- Lenders frequently reject loan modification requests.
- Financially struggling homeowners can frequently stay in their homes for many months despite not paying their mortgage loans (the lenders are frequently deciding to do nothing until foreclosure is absolutely imminent).
- Homeowners do sometimes walk away despite the personal responsibility - they get completely frustrated with the games lenders play.
- Walking away needs to be a viable option (albeit not the best one) for homeowners.
- Short sales and foreclosures will continue to increase.