While many banks gladly bade adieu to 2011, it's possible that even more are dreading 2012. The past year was a record year for banks -- but while they wished it was a record year for profits, that wasn't the case. 2011 will go down in the record books as a historic year for banks who were penalized for questionable lending practices and securities fraud. Last year marked the beginning of the punishments that banks will continue to receive for their role in the financial crisis that hit our country, businesses, and homeowners.
2012 looks like more of the same. In fact, the impending lawsuits, coupled with their potential to create hefty fines and penalties, can put some banks in jeopardy. As stocks fall, we may see an increasing number of banks fall to their risky practices. At the very least, there is certain to be a decline in their value and their lending ability.
Again, the cycle comes full circle. Risky lending practices and fraudulent activity by lenders caused the crisis now faced by many of the nation's banks; yet, ironically, it's not likely that the banks, or the economy, will see any improvement until there is significant improvement in the housing market (a crisis that the same lenders helped cause). Now, these banks have to face the fact that they are dependent on the reversal of the housing crisis that put many homeowners under water if they, too, want to stay above water.
In short, banks cannot survive without mortgage interest. If they aren't approving and writing new mortgages, they aren't making money. Unfortunately, foreclosures aren't the answer. Underwater mortgages also create losses, to homeowners, lenders, and the economy. Banks don't make money on empty and neglected homes, which are steadily falling in value and causing the value of homes around them to decline, as well. In order for banks to get out of the hole they helped dig, they must help to save homes from foreclosure and declining property values by modifying existing mortgages. The added benefit? In doing so, the same banks will be correcting the actions that produced extensive litigation in the last couple of years.
In 2011, a score of lawsuits resulted in fines as high as hundreds of millions of dollars. More on their heels and expected to be resolved this year. Some which allege faulty documentation and robo-signing are certain to affect foreclosures. The result: it's likely that foreclosures will be delayed as documents are reviewed. The remedy may include a higher number of mortgage modifications for those faced with impending foreclosures. Should that happen, lenders will be taking one step in the right direction toward resolving the housing crisis, which in turn, will boost the bottom line for lenders, increase the value of stocks, and inject a breath of life into a starving economy.
But that can only happen if those mortgage modifications include principal reduction. One-quarter of all mortgages are now underwater (meaning the balance owed on the mortgage is greater than the value of the real estate), and until the value of homes and mortgage balances meet, we'll continue to see foreclosures among homeowners who aren't willing to invest huge sums of money in a home that will not provide them with any equity.
The outcome of these lawsuits will continue to unfold throughout the year. Some banks may not be able to survive the penalties and fines which will be imposed on them. Others may attempt to offset their losses by modifying their lending practices or choose to save homes through modifications, rather than filing foreclosures. Others still may do the right thing and attempt to save homes by reducing the principal on at-risk mortgages, which in the long run, could benefit homeowners, lenders, and the economy.
What will happen is anyone's guess. But if 2011 was any indication of things to come, it's possible that banks will begin to make the necessary changes to stop the bloodletting? Here's to hoping that they choose to do the right thing before it's too late -- for them, their customers, and the economy.
Anna Cuevas, known as "America's Loan Modification Guru," has guided thousands of Americans in keeping their homes from foreclosure. A popular blogger (askaloanmodguru.com), Cuevas has been called a "superhero of the loan modification industry" and has been nominated for CNN's Heroes. She is the #1 bestselling author of SAVE YOUR HOME Without Losing Your Mind or Money.