Bankruptcy

Homeowners in Trouble--Don't be an industry statistic

By Katie Porter

The Mortgage Bankers Association released a study this month that touts the efforts of mortgage servicers and lenders to assist borrowers. The industry asserts that it "took major steps" to "help those borrowers who could be helped." Therein, lies the catch. While apparently relying on self-reporting by mortgage servicers (an industry facing numerous accusations of misconduct (see here and here and here)), even assuming accurate data, the study's methodology gives a big boost to the mortgage industry. How? The study begins by excluding as beyond help all loans on properties that servicers could not confirm the house was occupied by its owner (18%). It also excludes all loans in which the borrower defaulted despite a previous payment plan (29%). Notably, there is no evidence on the parameters of those plans--were debtors given an extra week to cure their mortgages or were these serious modification efforts? Given what we know about modification efforts from public securities filings, there is no way 29% of loans would meet a strong criteria of previous repayment plan. Most disturbingly though, from a policy standpoint, the industry points the finger directly at borrowers. It excludes 29% of loans from the group where it asserts modification is feasible because the "borrower would not respond." In his post on the House hearing on the mortgage modification bill, Prof. Adam Levitin reported on a witness' testimony that families in financial trouble may not respond to phone calls or open mail from creditors. My advice to homeowners--talk to your servicer or open mail from them. Better yet, contact them affirimatively to ask for a loan modification and keep records of your efforts in so doing. Don't be an industry statistic! Beyond this practice advice, the fact that industry says it can't reach 3 in 10 borrowers has important policy implications--including for the fate of the bankruptcy modification bill.

Why? Because loan servicers are the intermediaries between investors/lenders and consumers, and this industry is neither reliable nor responsible. Servicers operate on a low margin, and under standard incentives, they don't profit from making extra efforts to help borrowers. In fact, servicers often get to retain as profit certain kinds of default fees, such as late charges. They also charge a variety of convenience charges, such as for receiving information by fax or email, most of which are incurred when a debtor is in default and wants to verify how much is owed or wants to refinance. Any voluntary plan for modifications or helping troubled borrowers will rely on servicers' technology, incentives, honesty, and outreach. If the servicers don't make robust efforts to contact debtors or if debtors are reluctant to work with servicers because of bad customer service in the past, the system won't modify as many mortgages as might make economic sense. As I see it, one of the real advantages of the bankruptcy modification bill is that customers don't have to rely on their servicer's cooperation to get a modification. A family could affirmatively initiate a possible modification by filing bankruptcy and proposing a cram down; it wouldn't be trapped on hold or unable to figure out who holds their note or hear contradictory offers for modification each time it contacts the servicer. These procedural problems hinder the substantive modification process, and bankruptcy offers a venue to force the servicer and the consumer to communicate about what is an economically feasible modification.

Full post as published by Credit Slips on January 30, 2008 (boomark / email).