The question: “Why are the banks refusing to reduce the principal for the owner rather than foreclosing...

The question: "Why are the banks refusing to reduce the principal for the owner rather than foreclosing on homes and wholesaling them for pennies on the dollar"?

Some banks deliberately are holding off on foreclosing on homes and selling them as REOs, in part, because they want to avoid booking losses on their toxic mortgage-backed securities, said David Wyss, chief economist at Standard & Poor's. Taking the losses would limit their access to additional government money, he said.

"They want to keep the paper active," Wyss said. "They don't want to take a loss on those securities because it affects how much they can borrow against them for TARP money."

In the past week I have spoken to two different homeowners of properties with loan amounts in excess of $1M who have come to us through the email address of InvestorGroupContact@UniqueGlobalEstates.com asking for help. Both had FICO scores in the 750-800 range, both had situations where there was not direct ‘hardship" involved. Instead there were factors such as relocation and a need to downsize involved. Our Investor group cannot help owners unless there is "hardship", even though the values of the properties can be about 50% of the amount of the first loan. These owners are falling through the cracks.

This prompted me to begin to research on "why are the banks foreclosing on homes and then selling them for pennies on the dollar" after refusing to work with the homeowner in cases where the value has depreciated below the amount of the first loan and the owner needs to get out for any number of reasons (other than absolute hardship).

However, I did find excerpts from the below article that even though it does not address the luxury market niche specifically...it does have information that I believe you will find interesting and useful in communicating to your sellers that price reductions NOW are extremely important. Please note that this information (as well as other research) indicates that we will continue to see a "re-set' of value and pricing that will continue until 2011-2012 at least.

I personally believe that the trophy homes will not be as impacted as the rest of the luxury real estate market....but we just do not know at this time...it is still unchartered waters in a world we have never seen.

My hope is that you will be able to use the below information to assist your sellers in understand that this market is not a quick turn around (as we all wish it could be). Denial is still paramount. We know that all homes coming back on the market thru this "tsunami" will be significantly reduced and re-set the appraisal process which will impact lending and continue the spiral down.

Our goal is to assist you in communicating the facts to your sellers as part of being a consummate professional delivering the information they need to know...in order to make informed decisions.

Real estate owned properties expected to hit 1.5 million

Since this blog appeared 10 minutes ago, I just received a telephone message indicating that the "answer to the Question" is simply that the loans have been so sliced and diced that there is absolutely no way for a bank to reach out to all of the participants of portions of that loan to get agreement on modifying the original amount and/or terms. Rather, they must foreclose on the mortgage....and start over.

Very interesting....and it does seem to make sense as to the "why" of what we are observing......