One of the most glaring housing issues that hasn’t been resolved is loan modifications. There are multiple owners of the mortgage, the servicers aren’t incentivized to move forward.

There was an interesting article in the New York Times which described how the lack of traction in loan modifications may not be simply the lack of infrastructure to handle the volume but rather the incentive to loan servicer, those who make more money in fees by taking longer to move forward than to resolve rather than move on to the next case.

Less than 10% of modified mortgages result in a forgiveness of debt. Late fees and other associated payments are tacked on to the end of the mortgage term, resulting on higher payments or a much larger mortgage balance. In many cases loan modifications can result in higher payments – no wonder the default rate is high. How about modifying some stupidity?

Holden Lewis of Bankrate.com and I spoke about this yesterday in the podcast now available on The Housing Helix – he disagrees with the New York Times article premise that delay is profitable.

James Surowiecki’s “No Home Yet” article in The New Yorker lays out the modification landscape quite succinctly:

  • servicers can make more money on fees by “dragging their feet”
  • mortgagae delinquencies continue to rise
  • servicers can’t renegotiate in bulk
  • borrowers aren’t informed

But the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders. Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.

Speaking of scrambling.


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4 Responses to “Slicing The Way We Thinking About Loan Modifications”

  1. Edd Gillespie says:

    My speculation is that it isn’t delay. It is that mortgage loans can’t be peddled to secondary market investors any more.

    Lenders don’t want their money tied up long term – never have.

  2. Edd Gillespie says:

    If I understand the intent of the re-negotiating portion of the recovery plan it is to get the banks to put their dog in the fight and they won’t do it.

    It seems the old time bank with a concern for community is rare and banks no longer put their “skin in the game.”

    Too big to fail is turning out to be too big to care. But maybe this isn’t new. I remember Dad saying something to the effect of “cold as banker’s heart.”

  3. Tony Arko says:

    It is not that loan servicers make more money on fees, it is that they truly don’t care. If you have ever had the unfortunate experience of speaking to a bank employee in loss mitigation or loan modification or short sale departments you will instantly feel their complete lack of compassion. They are completely indifference to the homeowner. And they will tell you as much if you ask. I had a loan servicer from Chase tell me yesterday that she could care less if the house went to foreclosure. She was just doing what the “investor” said. No more. No less. And if I didn’t like it, she would reject the short sale. When I asked for a manager she again threatened to just reject the short sale. And the investor turned out to be Fannie Mae.

  4. I don’t think loan modification can give higher payments