Why Banks Won't Modify Your Loan

PHOTO: Long Billed Vulture (or Indian Vulture) - Gyps indicus. Wikimedia commons. Nidhin Poothully from Bangalore, India.
PHOTO: Long Billed Vulture (or Indian Vulture) - Gyps indicus. Wikimedia commons. Nidhin Poothully from Bangalore, India.

Ever wonder why banks have been so slow to modify home loans on the brink of foreclosure? I have. Well, part of the answer may have just been revealed in a recent story in London's Financial Times.

The story is about the resistance of some investors to get back into real estate, especially as the federal government winds down its programs that have propped up the market. Big investors like BlackRock, a leading bond investor, that once put money into home loans are staying on the sidelines because of an unresolved fight in the financial markets. If these investors continue to turn up their noses at bonds backed by mortgages, that would mean less money available for homes loans and higher interest rates as a result.

The dispute is over who bears the brunt of losses on distressed mortgages, in particular those linked to a second lien, as is often the case. And it goes a long way to explaining why banks have seemingly sabotaged the government's efforts at foreclosure prevention.