First, we are using the term lender generically in this case to mean the owner of the promissory note secured by the real estate in danger of foreclosure. It might not actually be the original lender. In fact, it will rarely be the original lender.
Second, this particular section applies only to mortgage lenders, not to the other types of creditors such as the IRS, judgment creditors, real estate tax collectors, and so on. Those will be covered in the answer to another question later on in this chapter.
So, what does motivate the lender? In a perfect world, the lender would continue to receive the income stream he or she anticipated over the period of time he or she expected to earn income. Receiving a lump sum of cash is certainly better than taking title to real estate through foreclosure, which is itself better than nothing. On the other hand, if those lenders want to loan money out and receive it back in a relatively short amount of time, they would make short-term loans, not home mortgage loans.
To further muddy the waters, many home mortgages were sold on the secondary market and then repackaged as bonds with differing maturities and interest rates. The whole system depends on borrowers making their payments according to pre-established schedules. Yes, the models do anticipate that some loans will default and others will be paid off early through home sales or refinancing. Large numbers of defaults throw a monkey wrench in the calculations, though.
Remember, the primary motivation is to continue receiving a stream of income. The secondary motivation is to minimize losses. The second goal might be met easily if there is PMI coverage, which shifts the lender’s loss to a third party. You might hit a brick wall with lender negotiations and wonder why the lender does not seem more motivated to reach a solution that will ultimately return more money to him or her than other options.
The answer might be that the other options might not result in as much of a loss as you think because of the existence of PMI coverage.