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,
Sulaiman Law Group, Ltd. 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).
For more in-depth analysis of the article, visit our consumer defense blog.