Do Banks Act In Their Own Best Interest?

Of course they do. Who else's interest would they prefer to act in? They're companies out to make profit. That's why in regard to mortgage modifications, I've often asserted that it's silly to imagine that they'll intentionally lose money on mortgages just because they feel bad for troubled homeowners. Instead, I believe that they would follow whatever course of action is most profitable -- even if that sometimes means willingly modifying mortgages to give homeowners a better deal instead of foreclosing. Felix Salmon appears to disagree.

On Wednesday, he wrote about the rather interesting court case of Indymac Bank F.S.B. v Yano-Horoski (.pdf). In it, Indymac stubbornly refuses to modify a defaulted borrower's mortgage or to venture down the path of several other alternatives for the homeowner retaining the home. The judge consequently condemns Indymac for not trying harder to figure out a solution for the borrower and awards her with the house with 100% full equity. Quite a win for the little guy, or gal in this case.

But I'm a little confused about how Salmon proposes that the bank here wasn't acting in its own best interest. If he means that its actions led to a judge awarding the home to the borrower, and that screws the bank, well that's true. But I seriously doubt that the bank believed that its actions would lead to that outcome. Otherwise, it likely would have thought twice. In reality, this more likely serves as situation where an activist judge was tired of banks not working to help homeowners, so ruled in the borrower's favor, rather than actually pay attention to what the mortgage contract said and uphold it.

Had the mortgage contract been upheld, then Indymac would have repossessed the home, as planned. Clearly, that's the outcome it expected its actions to bring. If Salmon means to speculate that the bank would have been better off if it had accepted one of Ms. Yaho-Horoski's modification alternatives than force her to foreclose, then I'm not sure I can agree. Frankly, I'd have to remain agnostic on the question, because I don't have the same information that the bank was privy to in order to make that determination.

For whatever reason, it didn't like the modification options Ms. Yaho-Horoski presented. Maybe it believed that they all had far more risk than just foreclosing and settling for whatever price it could obtain in the battered housing market. So the bank deemed foreclosure its best option.

Or as some have speculated, maybe banks like Indymac won't give anyone modifications because the action of even considering all mortgages for modification is more costly than just foreclosing on everyone. Since no bank has a 100% foreclosure rate, I find that unlikely, but I've heard that argument. Even if it is the case, then it's still acting in what it believes is its best interest.

I also wonder -- what other motivation could the bank have had other than its own interest here? I mean, you can say that maybe Indymac is just pure evil and wants everyone, including itself, to lose. But that seems a tad far-fetched.

Now Salmon and I certainly would agree that Indymac took some rather awful methods in attempting to get to its desired end. But that's different from saying that Indymac didn't think it was acting in its own best interest. If anything, I think that this case shows just how far banks or mortgage companies will go in order to try to secure their desired end. Here, Indymac actually went too far and angered a judge, so that the worst possible end resulted. But that clearly wasn't Indymac's intent, just its miscalculation.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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