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Big Banks...Small Banks

POSTED: Monday, December 21, 2009 - 10:18pm

UPDATED: Wednesday, March 17, 2010 - 11:07am

Who will work with you?

During this economic downturn, many experts have been urging Americans to move their business to smaller, local banks for mortgages and other matters.

Now, you have another reason.

When it comes to mortgages and particularly, troubled mortgages, it turns out the smaller the bank, the more willing they are to help you stay in your home.

"Even if the banks do decide to get more flexible, we're going to be talking about foreclosures well into 2013," says Robert Sharga of RealtyTrac, Inc.

The latest statistics are staggering.

“We are going to see a huge wave of adjustable rate loans,” Sharga says. “And when those reset, in that case their going to owe 100% of what they owed when they bought the house, and in the worse case, they’re actually going to owe more.”

The bundling of both good and bad mortages into what is called a security, which is then traded as any other collection of investments, is at the heart of the current recession.

And those large, investments make the banks that service them less willing to work with you when you get behind.

“If you’re Bank of America,” Sharga explains, “you’re servicing it for an investor somewhere who has given you parameters you can’t
contractually exceed.”

Now if your mortgage is with one of the big national banks, they might offer you a better interest rate, or even a deed in lieu of foreclosure. But a small local bank, might actually reduce the principle you owe.

The most common issues are un or under employment and home values that have dropped below what you owe.

“The first significant change we’re seeing is a higher number of foreclosures due to unemployment,” according to Sharga. “So right off the bat, virtually everybody who’s unemployed doesn’t qualify for the loan modification programs that are available.”

Smaller, local lenders who have your mortgage in their own portfolio are more likely to adjust the principle of the loan and that results in a re-default rate of only 25%.

"If you're a local community bank, and you give Bob Jones a mortgage,” Sharga told us, “and you hold onto that mortgage. First of all, you probably took less risk to begin with because you knew that loan was going to be on your books. Second of all, if Bob falls into hard times, you own the loan. So you relaly get to make the decisions about how much you want to work with Bob. "

Sharga says the number of people who default a second time from the big banks is 50% and the same holds true for Fannie Mae and Freddie Mac as well.

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