I first posted this article on November 10, 2009. I just came across it again and, unfortunately, it still seems completely relevant. I would love your feedback to know if you think any of this has changed over the past two years.
Have you worked on a loan modification or a workout with your lender in an attempt to avoid foreclosure? Have you faxed pages and pages of information only to have them tell you they haven’t received it, or that you faxed them to the wrong number, or that you faxed the wrong documents??
Have you gone through the modification process but been denied without a clear explanation as to why? Have you received incompetence and indifference from your lender?
If you’ve jumped though all of their hoops only to come out frustrated with no work out, you’re not alone.
In the last year, Consumer Affairs has received hundreds of complaints from consumers who said they followed loan modification instructions, faxing requested documents repeatedly, only to have their applications disappear.
And, that’s not the end of the frustration. According to an article in the Huffington Post, mortgage companies are more likely to foreclose on homeowners than modify their loans because they make more money off foreclosures.
A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed. What?
Loan servicing is the process by which a mortgage bank or subservicing firm collects the payment of interest and principal from borrowers.
When a homeowner is delinquent on a mortgage, the servicer must front the late payment to the investors. When a home is foreclosed, the servicer is typically first in line to recoup losses but, if a mortgage is modified, the servicer typically loses money that isn’t necessarily recoverable.
That’s part of the reason why the Obama administration created a $75 billion program, Making Home Affordable, to limit foreclosures. The money goes to servicers who successfully modify home loans, with the hope that the incentives to modify outweigh the incentives to foreclose.
Again I have to ask, “What?” Apparently, servicers are being paid tax payers’ dollars to “encourage” the servicers to help tax payers stay in their homes.
Typically, the loan servicer doesn’t own the loan. Servicers are companies, usually banks, hired to collect the money from the homeowner and deliver the funds to the investors who own the mortgage. The investors lose money if the property goes to foreclosure, the servicers (banks) do not.
Homeowners seeking to save their homes by modifying unaffordable loans typically deal with these servicers.
According to a National Consumer Law Center report, “servicers remain largely unaccountable for their dismal performance in making loan modification. Servicers have four main sources of income, listed in descending order of importance:
- The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool
- Fees charged borrowers in default, including late fees and process management fees
- Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner, and
- Income from investment interests in the pool of mortgage loans that the servicer is servicing
Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure.
The monthly fee that the servicer receives based on a percentage of the outstanding principal of the loans in the pool provides some incentive to servicers to keep loans in the pool rather than foreclosing on them, but also provides a significant disincentive to offer principal reductions or other loan modifications that are sustainable on the long term. In fact, this fee gives servicers an incentive to increase the loan principal by adding delinquent amounts and junk fees.
Then the servicer receives a higher monthly fee for a while until the loan finally fails. Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible.
The servicer may have to waive them to make a loan modification feasible but is almost always assured of collecting them if a foreclosure goes through.”
Let’s recap: The banks created impossible loans (increasing interest rates, interest only loans that convert to interest + principal) that ultimately caused homeowners to fail. When the homeowners could no longer repay these ridiculous loans , the banks cried so the government repaid the banks with the taxpayer’s money. Now that the banks were saved by our TARP money, they are profiting again by a fee system they created that pays them when homeowners fail.
Did I get that right?