Bankruptcy

Why So Few Home Loans Have Been Modified

By Meaghan Olson

Since the collapse of the housing market in late 2007, leaders, policymakers and financial experts have been looking for a solution to the nation?s mortgage-based financial woes.

Despite economic incentives from the federal government, though, few mortgage lenders have offered the loan modifications necessary to keep borrowers away from foreclosure.

This New York Times home loan article details why. In brief, here?s what?s going on:

• As part of recovery efforts, the Obama administration implemented a $75 billion program to reward lenders who modify troublesome home loans. The program essentially distributes $4,000 to lenders for each modified loan over a four-year period.
• According to a report from the Federal Reserve Bank of Boston, though, only about 3% of seriously delinquent loans have been modified in the foreclosure crisis. The reason? Banks and mortgage lenders can collect fees on delinquent loans. After a home goes into foreclosure and is sold at auction, the mortgage company can collect fees from the proceeds for insurance, legal services, title searches and appraisals.

Interests of Lenders & Borrowers at Odds

Though bank officials and others involved in making mortgage loans have reportedly denied that they would act solely for profits, evidence seems to point toward just such behavior.

While most borrowers ? and the housing market in general ? would benefit from modified loans, many lenders stand to lose money from stopping foreclosure.

This trouble in home lending is really just the most recent manifestation of the system that allowed the market to get so out of control ? and to collapse so heavily ? in the first place. Here?s what happens:

1. A borrower takes out a mortgage loan and agrees to pay a certain amount of interest.
2. The loan is put into a pool of loans, divided and sold to investors in pieces.
3. Every time a borrower makes a payment, some of the interest goes to each investor who ?owns? part of the debt.
4. Loan servicers, who act as middlemen in this process, collect service fees every time they have to service the loan in some way (e.g. by assessing late fees).
5. Servicers acting in their best interest, then, often prefer to limit loan modifications and milk late and delinquent loans for fees.

Additional Resources

Why Don?t Lenders Renegotiate More Mortgages?

American Recovery and Reinvestment Act of 2009

Full post as published by The Bankruptcy Blog on August 09, 2009 (boomark / email).