There is a hidden secret in the foreclosure business. Many lenders are losing money by turning down loan modifications. Here is how it works. A borrower offers to pay his lender the monthly payment for a $400,000 mortgage. The lender turns it down and forecloses on the home.  

They put the home on the market and it ends up selling for less than $400,000. If it sells for $350,000, then we could easily argue that they lost $50,000. Let me give you a real life example.

A person buys a house for $300,000. The local housing market declines and the house is not only worth $220,000. The homeowner's income drops and now they can only afford to pay the equivalent of a $220,000 mortgage payment.

They request a loan modification. Their lender turns it down. The house goes to foreclosure. Eighteen months later, the home gets foreclosed. The homeowners move out.

The lender lists the home for sale. Because of the continued decline in the housing market, the house ends up selling for $180,000.

The moral of the story is: The lender would have been better off accepting the $220,000 loan modification versus foreclosing and selling the property for $180,000. 

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