Foreclosures – More Profitable Than Loan Modifications?

Foreclosures - More Profitable Than Loan Modifications?

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?

This post has 13 Comments | Would you like to leave a comment?

13 Comments

  1. Mary:

    As far as I understand, yes, Ocwen will collect Chase’s late fees. Ocwen is simply a servicing company. They do what the lender tells them to do. They collect the amounts the lender tells them to collect. They, pretty much, make no decisions on their own, just take the process away from Chase and handle it for them, instead of them.

  2. Chase transferred by servicing to Ocwen. I was behind 2 months and owed $1900 in late fees, will Ocwen try to collect Chase’s late fees? New account activation shows 1 month due. They do show it as a forebearance payment due. What do you know about this. Just activated my account yesterday 2/19/12 on-line with Ocwen.

  3. Mia: I agree, any modification, or communication with the lender for that matter, creates uncertainty.

    Ocwen does just service the loan. They collect your payments for Chase. This should not affect your agreement with Chase.

    Your trial period for a loan mod is an agreement only with Chase. Ocwen will collect whatever Chase tells them to collect. This is where the concern creeps in – will Chase keep Ocwen informed of any changes made to your agreement? Accept the modification if they allow it and do what you can to make sure the change is communicated to Ocwen.

    It should be. We have had a number of cases where it has worked smoothly for us, just as explained. Continue to make your ontime payments, keep good records of dates, times, and agent names for all phone calls.

    Yes, your phone calls with the lender should always be recorded. When they have denied something I have been told in the past, I look at my notes and tell them the name of the person, date, and time I was given the information. They then researched and called back to tell me I was correct. Keep Good Notes!

    If you’re paying on time and this goes as it should, you will get your modification. Keep the best open communication you can with Chase. Don’t “assume” it’s being handled if you don’t hear back. Keep calling until you have a final answer. Ask for all documents to be emailed to you so you have an immediate record of anything they promise or change.

    We find online accounts the easiest way to keep track because you can see changes immediately and know for sure what they are looking for from you.

    Good luck with this, it should go smoothly, and keep us posted as the process unfolds!

  4. I should also add that I have communicated with Chase several times on the phone in which they recorded many conversations but have not sent me anything regarding FINAL MODIFICATION AGREEMENT. I have not been approved, and I am just in my TRIAL payment periods which I plan to make on time. However since I have a new service provider, how will this transfer through?? Again, any help provided, is appreciated.

  5. I have been current on my payments for almost 8 years and although I work, I can’t afford the 2/28 ARM I am on because I don’t make enough money. I lost a job in 2007, and began working very long hours to support my very high interest rate, just so i can stay current on my payments.

    Chase is my loan service provider, and Aurora Loan Services is my 3rd party investor. I do not have a Fannie May or Freddie Mac Loan.

    Chase sent me a letter, they approved me for a 3 month payment trial period. This agreement started on March 1, 2012. I made my payment and on March 17, 2012, I received a letter from Chase, my service provider stating that JP Morgan Chase bank, N.A. has transferred me to a new service provider, named Ocwen Loan Servicing, LLC on April 2, 2012. It says, this transfer of servicing your loan does not affect any term or condition of your mortgage documents, other than terms directly related to the servicing of your loan.

    I panicked when I read this, because I’m not sure what it means, which has brought me to yours and several other columns? Please Help!! Is it wrong for me to agree to a loan modification if I get approved for one after my trial pay period ends? i’m confused??

  6. Do the banks get a fee for everything / anything they do? I would count on it. Try the HAMP program. The government provides incentives to banks and the mortgage holders for doing modifications. Please let me know what you find out with that and thanks for asking.

  7. Do the banks get a fee for initiating the modification for a borrower? Has anyone worked with CHASE. I have a tax client that wants me to help him but I have heard that it is an exercise in futility?

    Any thoughts?

    fcp12065@aol.com

  8. Hi Romanita:

    Modification depends upon many things: the lender, your credit, your employment, how far you are behind or if you are behind on your loan payments. Modification is not location specific so there is no specific program for Greensboro.

    The only way for you to get an answer to your question is to contact your own lender and find out what they require.

    Thanks for asking!

  9. Hi David:

    Unfortunately, the banks have all the power in these situations and we can never predict what they will do. You’re right, it often depends upon the mitigator you work with. Oftentimes, trying someone else works like a charm. It can also, however, fall flat. As you’ve seen. Sounds like your first offer was better? Maybe you can negotiate back to it.

    45 minutes to decide is crazy. However, they have the power. In a short sale, it can take 6-8 months to get things completed because the banks are so slow to respond and then they demand to close in 2 weeks. It’s good to be king.

    Best thing to do is to keep negotiating. Call constantly until you get someone who takes the time to discuss and explain. Those people do exist. As long as the property has not gone through auction, you are able to work with them. They do not want your home.

    Good luck and please let us know here what happens. Thanks for writing.

  10. I have just received an offer from B of A. they increased my contribution considerably from the first offer,I am considering walking from this deal in hopes of getting a different negotiator and a more favorable deal with the new negotiator. They gave me 45 minutes to make a decision or the file would be closed (gun to head).
    What are your thoughts, in the interim, they could foreclose and that would not be a good
    outcome.
    David

  11. I want to know more about modification progran in greensboro.

  12. I had someone ask if banks get paid the full amount by mortgage insurance. I was told they receive 80% of the loan amount. Is this correct?

  13. Very good article Karen, aren’t we just so happy to be tax payers in this country. Whatever happened to the real essence of taxes.

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