Not only no, but “there oughta be a law!” There should be legal and criminal sanctions against lenders which dump losses onto the backs of good borrowers. Where on earth do lenders get the notion that they have a right to maintain their profits at the expense of good customers who never did agree to pay for their bad or unfortunate lending decisions?
Lenders who engage in this practice should be required to disclose that they engage in such practices, perhaps in the form of an international warning sign that has to be placed on every advertisement, every contract, and all other printed materials related to their loans. Lenders who engage in this practice should be required to produce current and accurate details of their loan failure rates, too!
Why not insure that the borrower is made aware of the lender’s profit taking practices in a form that is clear and easy to understand?
In the lending business, profit is made when the lender makes contracts with those who pay back their loan principal and interest. The interest is calculated to cover overhead and other costs and to insure a certain amount of profit. Losses occur when a borrower cannot pay back the money and the collateral is taken to clear the debt. The collateral can be sold to recover at part , most, or all of the principal.
In far too many cases, if the lender had simply renegotiated the loan to allow for lower payments, there would be no foreclosure and there would be far less lost profit. So the lenders are at fault in those foreclosures, too. Why should the other borrowers absorb the consequences of the lenders’ bad decisions?
This is an incredible situation. Lenders can keep the property as assets and sell the assets to recover money. The lender has already taken money from the borrower who may have paid down payments and paid other upfront costs. For a time, the failed borrower may have made mortgage payments for a time. Add in the money taken from the good borrowers, and the lender can actually orchestrate enormous and completely unethical schemes to convert funds and to take enormous profits.
The incentive should be for the lenders to exercise caution when making loan agreements, to renegotiate mortgages or lower interest rates in order to allow troubled borrowers to remain in their homes, or to prepare to take the losses out of their own profits.
With full disclosure, potential borrowers can make more informed decisions when they choose a lender. At least the most qualified borrowers can choose to go with a more ethical lender.
If this was a matter of law, further incentives in the form of fines and criminal prosecution would help to end this practice.