Loan Modifications, Loss Mitigation Incentives and Other Greedy Games

Have you ever heard about having your cake and eating it? That’s what many mortgage providers are trying to do with loan modifications. How so? As it is well known the Government offers lenders incentives for processing loss mitigation actions. Loss mitigation action is code for loan modifications. What has been the result of the Government’s loan modification incentive program?

Banks, lenders and servicer have of course gladly accepted these “incentives” for processing loan modifications. But what has been the result for borrowers?

Mortgage Letter 2009-35 sent to all Government approved mortgagees on September 23^rd 2009 provides a surprisingly honest picture. This letter is quite interesting as an exercise in stating the obvious and calling mortgagee providers thieves to their greedy faces.

The second paragraph of Mortgage Letter 2009-35 is priceless:

The recent economic slow-down has increased demand for loss mitigation actions, including but not limited to, loan modifications. Recent industry studies of these loan modifications revealed that borrowers who experienced an increased mortgage payment on a modified loan had a significantly higher re-default rate than borrowers whose loan modification provided a lower payment.

If you thought loan modification research studies were a waste of time, think again. The Government has come up with a breakthrough. Borrowers in financial trouble are more likely to re-default on their mortgages when their monthly mortgages are increased! Shocking.

I’m sure David H. Stevens, Assistant Secretary for Housing, the author of the letter, knew he was stating the obvious because the in the very next paragraph he hits the mortgage industry with a brutal honesty that is refreshing to say the least:

FHA reviewed its recent insured loan modifications and found that, generally, they resulted in higher payments to the borrower. The higher payment was the result of not lowering the interest rate to the current market rate and/or not extending the term to the maximum of thirty years authorized under 24 CFR 203.616. Generally, the loan modifications simply capitalized the past due amounts and allowable charges and did not extend the term of the loan.

May I personally congratulate Mr Stevens, or whoever writes his letters, on the construction of that paragraph. There is nothing we didn’t know there but it is nice when a Government official simply goes out on a limb and says it.

So this is the picture: Banks provide loan modifications to troubled home owners which generally don’t reduce their monthly payments and simply add on the late charges and interest to the mortgage without even extending the loan term and get an incentive from the Government for their troubles.

The above mentioned letter set out that these practices were to stop in a 30 day period from the date of the letter, that was the end of November 2009, and that any loan modifications where the interest rate was not reduced would not apply for a loan modification incentive. I guess it is a start.