Banks Get Sweetheart Deals to Foreclose on Homeowners

I’ve been talking about some of the reasons it can be so hard for you to get a loan modification. Trying to fight your lender by yourself is basically like trying to fight Mike Tyson in his prime. I knew it was tough out there, but I was recently shown a video that explains yet another reason that the banks do NOT want to give you a loan modification.

The video details one huge example of how banks are using the federal government to make billions and billions of dollars off the housing crisis. Want a home loan modification or to get into a loan modification program? Well, the bank has plenty of reason to say no.

One example detailed in the video was the sale of IndyMac Bank, which was taken over by the government in July 2008 and sold to OneWest Bank, , which was owned at the time by Goldman Sachs VP Steven Munchen and big Goldman Sachs investors George Soros and John Paulson, in March 2009. Before its failure, IndyMac Mortgage Services was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the US. The failure of IndyMac Mortgage Services was the fourth largest bank failure in US history.

The FDIC, which is the arm of the US government that insures all money deposited in banks across the country, sold all of IndyMac’s loans to OneWest bank for 70 percent of the original loan balance. OneWest turned around and began foreclosing on those IndyMac loans or short selling them to get about half of what the original loan amount had been. Why would they do this?

Let’s say, for example, that OneWest got a loan that was originally valued at $500,000. They paid $350,000 to buy it from the FDIC who bought it from IndyMac under the government’s Toxic Asset Relief Program (TARP) when they spent billions of taxpayer dollars to bail out the banks. Now OneWest turns around and sells that home for $200,000 in a short sale. It looks like OneWest just lost $150,000, but not so fast.

In addition to selling OneWest all the mortgages for 70 cents on the dollar, the US government agreed to cover 80-95 percent of the losses the bank might incur from short sale or foreclosure. Remember, the US government means you and me, the taxpayers. The most important part of the loss calculation was that the amount of loss was calculated based on the full amount of the loan. The amount was not calculated based on what OneWest actually paid for the loan.

So if OneWest spent $350,000 to purchase the loan and then sold it for $200,000, it seems like they’re losing $150,000, but they’re not. In addition to getting the $200,000 they got on the short sale, the government pays them 80 percent of the $300,000 they lost on the original mortgage value (500,000 – 200,000) even though they didn’t pay the original mortgage value. In the end, they get paid $200,000 for the short sale, plus $240,000 (80 percent, the lowest amount they could get) from the US government (the taxpayer) for a grand total of $440,000 and a gain of $90,000.

In addition to making $90,000, OneWest was forced foreclosed homeowners to sign a promissory note, often for a large percentage of the home’s value.

You can see why a bank like OneWest wants to foreclose on your home. They stand to make hundreds of thousands of dollars as soon as it’s sold, even if they sell it for half of what you paid for it.