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Slicing The Way We Thinking About Loan Modifications

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 [1] 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 [2] – no wonder the default rate is high. How about modifying some stupidity?

Holden Lewis of Bankrate.com and I spoke about this [3] 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 [4]” article in The New Yorker lays out the modification landscape quite succinctly:

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 [5].