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The story is missing some context for me. I can see how banks could induce default by putting people onto modification trial payments for long spans then denyin

by nullc 13y ago

The story is missing some context for me. I can see how banks could induce default by putting people onto modification trial payments for long spans then denying the modification and demanding the difference... but what crazy incentive structure made it in the interest of bank employees to do this? Like a lot of things I think this stuff will make more sense if I could understand how the incentives were setup.

fr0sty 13y ago
I have the same question on short sales. Banks approve these things but then give buyers the run-around for months until they just give up. Eventually the forclosure goes through and the house is listed for 60% of the short sale price and sells a little higher. I can't imagine why the bank would throw away 35% of the value and sell a house as a forclosure instead of helping a short sale go through. Has to be messed up incentives but I can't begin to guess how they are set up.
- DougWebb 13y ago
  My guess is that they're writing off the full value of any bad loans, which reduces their taxable revenue from other sources. That must work out better for them then trying to get the loans paid back at reduced rates. Maybe they write off all of the high-rate interest for a 30 year loan period, which is way more than the likely income from a lower-rate loan over the same period. Nevermind that they could never actually collect the whole term's interest at the high rate. Whenever you're trying to figure out BoA, you have to keep in mind a few rules: they cheat, they steal from their customers, they lie to everyone including the government, and they do whatever gives them the most profit. You can assume their actions make perfect sense in light of those rules, if you knew the the accounting.
  - fr0sty 13y ago
    Understood, and what you say _may_ factor into the thinking re: loan modifications, but my question was about short sales. In these cses the homeowner wants out and there is a willing buyer at X (which is less than the amount owed on the loan Y). In these cases why would the bank drag their feet when offered X (writing off Y-X) and opt to foreclose and accept Z which is .5X? Unless they are in some weird tax situation where a dollar written off is worth more than a dollar earned (unlikely) the only motivation I can think of is spite or ineptitude (since the owners credit is ruined regardless and the bank makes less money). There is perhaps some consideration to the fact that foreclosures are sold "as-is" for cash rather than financed with contingencies but that can't be worth the dollar amounts we are dealing with...
    - FireBeyond 13y ago
      "Unless they are in some weird tax situation where a dollar written off is worth more than a dollar earned (unlikely)" Actually, quite likely - $1 written off has a net "value" of $1 when written off, adjusted tax, etc., whereas $1 earned is actually $1 minus corporate tax rate.
- MaysonL 13y ago
  The point is, in most of these cases, BoA is NOT the owner of the loan, they are just servicing it, and they make larger fees from foreclosure than they do from short sales. In other words, they are screwing both the homebuyer, and the investors who own the bonds which own the mortgage.
gwern 13y ago
> what crazy incentive structure made it in the interest of bank employees to do this? Nothing fancy: > Senior managers provided carrots and sticks for employees to lie to customers and push them into foreclosure. Simone Gordon described meetings where managers created quotas for lower-level employees, and a bonus system for reaching those quotas. Employees “who placed ten or more accounts into foreclosure in a given month received a $500 bonus,” Gordon wrote. “Bank of America also gave employees gift cards to retail stores like Target or Bed Bath and Beyond as rewards for placing accounts into foreclosure.” Employees were closely monitored, and those who didn’t meet quotas, or who dared to give borrowers accurate information, were fired, as was anyone who “questioned the ethics … of declining loan modifications for false and fraudulent reasons,” according to William Wilson.
- dopamean 13y ago
  Still, why would the banks want the customers to be foreclosed upon?
- d4vlx 13y ago
  Do you know why BoA wants to foreclose on so many properties? In my naive understanding of American mortgages it seems to make more sense for them so keep mortgages active as long as people are paying.
  - jordanb 13y ago
    Remember that BoA doesn't actually own the risk on the mortgage. That was sold to owners of the Mortgage Backed Security. BoA is the servicer of the loan. Think of it as a fund manager. So when the mortgage is foreclosed, it's not BoA that takes the loss, it's the owners of the MBS. The article says: "they also pushed people into foreclosure to collect additional fees from them." BoA has discovered that foreclosure is more profitable than loan modification for them due to the fees they charge in the former case.
    - nullc 13y ago
      Thanks! Thats exactly the detail I was missing.

by nullc 13y ago

fr0sty 13y ago

I have the same question on short sales. Banks approve these things but then give buyers the run-around for months until they just give up. Eventually the forclosure goes through and the house is listed for 60% of the short sale price and sells a little higher. I can't imagine why the bank would throw away 35% of the value and sell a house as a forclosure instead of helping a short sale go through. Has to be messed up incentives but I can't begin to guess how they are set up.

DougWebb 13y ago
My guess is that they're writing off the full value of any bad loans, which reduces their taxable revenue from other sources. That must work out better for them then trying to get the loans paid back at reduced rates. Maybe they write off all of the high-rate interest for a 30 year loan period, which is way more than the likely income from a lower-rate loan over the same period. Nevermind that they could never actually collect the whole term's interest at the high rate. Whenever you're trying to figure out BoA, you have to keep in mind a few rules: they cheat, they steal from their customers, they lie to everyone including the government, and they do whatever gives them the most profit. You can assume their actions make perfect sense in light of those rules, if you knew the the accounting.
- fr0sty 13y ago
  Understood, and what you say _may_ factor into the thinking re: loan modifications, but my question was about short sales. In these cses the homeowner wants out and there is a willing buyer at X (which is less than the amount owed on the loan Y). In these cases why would the bank drag their feet when offered X (writing off Y-X) and opt to foreclose and accept Z which is .5X? Unless they are in some weird tax situation where a dollar written off is worth more than a dollar earned (unlikely) the only motivation I can think of is spite or ineptitude (since the owners credit is ruined regardless and the bank makes less money). There is perhaps some consideration to the fact that foreclosures are sold "as-is" for cash rather than financed with contingencies but that can't be worth the dollar amounts we are dealing with...
  - FireBeyond 13y ago
    "Unless they are in some weird tax situation where a dollar written off is worth more than a dollar earned (unlikely)" Actually, quite likely - $1 written off has a net "value" of $1 when written off, adjusted tax, etc., whereas $1 earned is actually $1 minus corporate tax rate.
MaysonL 13y ago
The point is, in most of these cases, BoA is NOT the owner of the loan, they are just servicing it, and they make larger fees from foreclosure than they do from short sales. In other words, they are screwing both the homebuyer, and the investors who own the bonds which own the mortgage.

gwern 13y ago

> what crazy incentive structure made it in the interest of bank employees to do this? Nothing fancy: > Senior managers provided carrots and sticks for employees to lie to customers and push them into foreclosure. Simone Gordon described meetings where managers created quotas for lower-level employees, and a bonus system for reaching those quotas. Employees “who placed ten or more accounts into foreclosure in a given month received a $500 bonus,” Gordon wrote. “Bank of America also gave employees gift cards to retail stores like Target or Bed Bath and Beyond as rewards for placing accounts into foreclosure.” Employees were closely monitored, and those who didn’t meet quotas, or who dared to give borrowers accurate information, were fired, as was anyone who “questioned the ethics … of declining loan modifications for false and fraudulent reasons,” according to William Wilson.

dopamean 13y ago
Still, why would the banks want the customers to be foreclosed upon?
d4vlx 13y ago
Do you know why BoA wants to foreclose on so many properties? In my naive understanding of American mortgages it seems to make more sense for them so keep mortgages active as long as people are paying.
- jordanb 13y ago
  Remember that BoA doesn't actually own the risk on the mortgage. That was sold to owners of the Mortgage Backed Security. BoA is the servicer of the loan. Think of it as a fund manager. So when the mortgage is foreclosed, it's not BoA that takes the loss, it's the owners of the MBS. The article says: "they also pushed people into foreclosure to collect additional fees from them." BoA has discovered that foreclosure is more profitable than loan modification for them due to the fees they charge in the former case.
  - nullc 13y ago
    Thanks! Thats exactly the detail I was missing.