Money over Modifications

Everyone agrees that far too few of the homeowners who are facing foreclosure are getting loans modifications that enable them to keep their homes.  But there is lots of disagreement about why this is the case.

One explanation is that the volume of phone calls and applications is so massive that it overwhelms limited staff.  Another is that loan modifications are not offered because the investors who own the loans have calculated that loan modifications result in bigger losses than foreclosures do.  A third is that mortgage servicers, the companies who deal with troubled borrowers, are paid in a way that makes loan modifications too expensive for them.

The Obama administration’s current Home Affordable Mortgage Program (HAMP) includes a response to this third problem.  It offers servicers $1,000 up front, plus another $1,000 during each of the next three years for every successful loan modification.  This may sound like a lot, but it hasn’t been enough for many mortgage servicers.  As a result, we’re seeing few modified loans and more families facing foreclosure.

A recent article in the New York Times has another theory about why modifications aren’t happening: servicers have found a new income stream through fees levied before foreclosure.  These can include late fees, insurance, assessments, and legal services.  When the house is finally sold, the servicers get reimbursed from the proceeds.  The longer a loan can be kept in delinquent status, the more fees accumulate.  Some homes, like the one in this article, can be waiting for their foreclosure to finish for up to two years.

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(Photo: Tracy O)