Loan Modifications, Servicers and Who Is Profiting From the Credit Crisis

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The news is full of loan modification horror stories describing how homeowners have struggled for months with lost documents, changing standards, unreasonable loan modification agents and the slow tides of bureaucracy. Bad news does always seem to travel faster and further so you don’t hear half as much about the hundreds of thousands of loans that have been successfully modified.

However the question still remains why loan modifications are moving so slowly if the government is willing to pay the bill for the expenses mortgage servicers and investors have to incur when modifying a loan. Recent studies seem to indicate the reason is that the incentives and handouts the government is making through HAMP and TARP just don’t cover the real cost of modifying the fast increasing volume of loan modification applications.

How can this be so when TARP and HOPE have deep pockets of over 75 billion dollars? The answer seems to lay in the mortgage servicers, the companies that collect monthly mortgage payments and then distribute them to the investors that lent the money in the first place. Mortgage servicers have found it is often cheaper to foreclose on homes than to offer a loan modification even though a loan modification would benefit both the borrower and the investor.

The key is not only the rate of return when managing loans and loan modifications but the expenses related to the operations. The assumptions we generally have as consumers is that foreclosures are a bad deal for everyone. Numbers that are thrown around for example are losses of 10 to 20 percent for lenders on short sales while lenders have to face 20 to 30 cents to the dollar when dealing with foreclosures.

These figures only tell part of the story, mortgage servicers have other ways of measuring profit and often have different priorities. A recent report examined foreclosures between 1995 and 2009 and found that loan servicers made more money by offering forbearance (a period of time where the borrower does not have to make payments so he can consolidate his finances) than by cutting principal or reducing rates of interest, which is what loan modifications do.

This means that when deciding between foreclosure and loan modification loan servicers have to choose between certain loss with loan modifications and potential profit if they foreclose the loan. What would you do? Exactly. This is why loan servicers have been dragging their proverbial feet with loan modifications. Of course there are also other issues to consider like public opinion and bad publicity. The government has tried to use this weapon by publishing loan modification leagues that encourage banks to reorganize their systems to increase loan modifications.

So what is the solution? No easy fixes obviously or they would have already been implemented. However the administration could enforce stricter rules that regulate foreclosure and make loan modifications more attractive like regulating loan originations, mandate loan modifications before foreclosure or have third party loan modification mediation programs that control what mortgage providers do.
The best thing you can do now if you are at risk of foreclosure or behind in your payments is to contact the HOPE program by visiting their website or calling 1-888-995-HOPE.