Why Do Banks Foreclose Rather Than Negotiate With the Owner, Who Can Pay the Sale Price They Want?

Question: I watched your recent piece on Florida. The question that begs to be answered is WHY the banks would rather foreclose on a property and sell it someone else for 30 cents on the dollar instead of selling it to the current owner for 30 cents on the dollar? As my husband and I watched, we were left with this unanswered question – why don’t the banks negotiate with the current owners? Your clarification would be greatly appreciated.

Paul Solman: Much of the answer lies in the complexity of mortgage securitization: the fact that most mortgages were bundled with others and then essentially sold to investors, everywhere in the world. So who “owns” any given mortgage? It’s just not clear. That makes it difficult to renegotiate the terms of a loan, provides no incentive for the “servicer” of the loan — a bank like Citi or Bank of America — to do so either. (In fact, it costs them money and might leave the bank open to lawsuits from the investors.)

We’ve just put together a video that tries to show some of this in the context of Cape Coral. We will be posting it here in the next few days.