Anyone who has attempted to get a loan modification from their mortgage servicer has probably asked, "Why is it so hard to get a loan modification?" Trying to get a servicer to modify a loan can be a full-time job. In fact, Atlas Consumer Law has a full-time loss mitigation staff.
A typical loan modification can involve submitting financial documents and then re-submitting them when the servicer claims it never received them. It is not unusual to spend hours on the phone, mostly on hold, waiting to speak to someone who likely knows very little about the loan file. Once a trial loan modification is approved, some borrowers discover that one trial becomes multiple trial modifications. More often than not, servicers inform borrowers that the investor won't approve a loan modification.
The investor story is a lie.
For the vast majority of American mortgages, the investor has little to no involvement with the loan modification process. In fact, most mortgage loans have been pooled into trusts. The trusts then issue bonds that are sold to investors. No individual investor owns any one particular loan. The investors merely own what is called a "beneficial interest" in the performance of all of the loans in the pool. Quite simply, when the loans are paid on time, investors see profits based on the type of bonds they have purchased. Most investors are seeking stable, long-term gains; loans that are paid on time are in their best interest.
Why do servicers deny loan modifications and proceed to foreclosure?
Profit. Servicers make more money when homeowners are in default on their mortgages. When a property is sold via the foreclosure process, servicers realize immediate financial gains. More often than not, what is profitable for a servicer is not in the investor's best interest.
Why don't more loan modifications involve principal reductions?
Profit. Servicers get paid a fee for servicing a loan. That fee is based on the loan balance. A $500,000 mortgage loan is worth more to the servicer than a $350,000 mortgage loan. Don't forget that servicers make more money when a loan is in default. Lowering the principal balance on a loan hits the servicer's profit margins on multiple levels. The servicing fee is reduced and the servicer cannot collect its default servicing fees.
Is there a way to make obtaining a loan modification easier?
Nobody can guarantee success in an environment where the system gives servicers strong incentives to deny loan modifications. However, making loss mitigation a part of a larger consumer defense strategy can provide home owners with some much-needed leverage.
Whether the stragegy involves fighting a foreclosure lawsuit in state court, seeking protection under the U.S. Bankruptcy Code, or filing a lawsuit against a servicer or lender in federal court will depend on several factors. A good strategy will take the value of the home into account and will always seek to provide the most predictable result possible.
The system is designed to benefit servicers, not borrowers. Borrowers need to exercise their rights in a purposeful and strategic manner.
This post is based on information gathered from Diane E. Thompson's article in the Washingon Law Review. For Westlaw and Lexis users, the cite is: Thompson, Diane E., "Foreclosing Modifications: How Servicer Incentives Discoruage Loan Modifications," 86 WashLRev 0755 (2011).