Options Wonderland

[samaelrocks]

I still say at least some of the financial crisis would have been avoided if banks simply re-wrote the terms on those subprime mortgages to more favorable conventional terms. It's cheaper for a bank to do that than lose an average of 40k bucks through a foreclosure. So the bank and borrower made a bad choice doing the creative financing. Well, the bank can either hurt the borrower and double/tripple the payment on them or they could recognize that the borrower could never afford that and rewrite the terms.

Banks would rather shoot themselves in the foot and employ more foreclosure lawyers than to take their half of the responsibility of selling a risky mortgage.

I know there's a lot of folks who simply said screw it and left their houses or refused to pay. But given the chance, I'll wager most of those subprime borrowers would still be making payments on their homes if the banks were more flexible.

IMO, banks share at least half of the responsibility of being fiscally irresponsible but banks hold 90% of the control on how to work things out. Banks did this to themselves to the market's peril.

Edit - The average cost to a bank to foreclose is 60k, not 40k.
http://www.therealestatebloggers.com/2007/05/07/freddie-mac-says-typical-foreclosure-costs-60000-dollars/

Edit again - Combined cost to foreclose for the lender, borrower, local government and neighbors is 75k!
http://www.bloggingstocks.com/2007/12/04/foreclosure-costs-explained-75-000-per-house/

Why wouldn't the banks reach out and simply rewrite the loans to more favorable terms?