Banks really do prefer foreclosure
New study says loan servicers lack financial incentive to modify mortgages.
At the start of the foreclosure crisis, personal-finance experts urged struggling homeowners to contact their lenders if they started to fall behind on their mortgages. The lenders want to do everything they can, homeowners were told, to avoid a foreclosure.
Now, the experts aren't so sure that's the case.
Consumers who have jumped through a frustrating series of hoops to achieve a mortgage modification -- a lower interest rate or more manageable payments -- are convinced that conventional wisdom is flawed.
Jason, of San Diego, said he's become frustrated trying to complete a loan modification.
"I have gone through the modification process but have been denied, although no clear explanation was provided," Jason told ConsumerAffairs.com. "I have been seeking assistance and guidance from quite a few bank representatives and have only received rude, misguided information."
In the last year ConsumerAffairs.com has received hundreds of complaints from consumers who said they followed loan-modification instructions, faxing requested documents repeatedly, only to have their applications disappear into a black hole.
"I faxed papers repeated times and was told that I need to fax more or that they never received them so they can start a modification," Maria, of Sussex, N.J., told ConsumerAffairs.com. "I made payments and they never credited my account. Now they call in October 2009 and they tell me that they stopped the modification because I never faxed out the papers. Is this a joke?"
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Regardless of the loan servicer, the story seems to be the same. Consumers start down a road they think will lead to a modified mortgage, only to meet a wall of incompetence and indifference at the mortgage company.
"We sent all information requested by certified mail," Regina, of Whitefish Bay, Wis., told ConsumerAffairs.com. "As the others have described, we have had to make contact. They do not respond. The usual answer is 'Whoever told you that is wrong.' I actually have a tape of one of their agents stating, 'I can't be responsible for what someone else told you.' Should they not be required to respond in writing? Is this not a government-funded program?"
The Treasury Department did, in fact, begin a loan- modification program in March to encourage loan servicers to modify troubled loans to prevent foreclosures. But the process has proved slow, and for many, frustrating. Meanwhile, foreclosures continue unabated.
A new report by the National Consumer Law Center says it's no mystery why loan servicers seem to be dragging their feet in modifying troubled mortgages. The report suggests these companies actually stand to profit if the troubled property goes to foreclosure.
The report, "Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior," reveals that servicers, unlike investors or homeowners, generally don't risk losing money on foreclosures.
"One common-sense solution to the foreclosure crisis is to modify the loan terms in more instances," said Diane Thompson, an NCLC attorney and author of the report. "Foreclosures are a costly ordeal for the homeowner, the lender, and the community. Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes."
In almost every case, the loan servicer doesn't own the loan. It's simply a company -- usually a bank -- hired to collect the money from the homeowner and deliver the funds to the investors who own the mortgage. The investors lose money if the property goes to foreclosure, but the servicer doesn't.
Homeowners seeking to save their homes by modifying unaffordable loans typically deal with servicers. That is why the financial interests of servicers have the potential to hurt homeowners, the report says.
And too many of those financial incentives encourage servicers to ignore the interests of homeowners. For example, the report suggests that servicers often deny homeowners principal and interest rate reductions because as servicers they find it profitable to offer repayment plans or forbearance agreements that do little to reduce homeowners' debt burdens.
"Loan modifications inevitably cost the servicer something," the report says. "A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed."
The NCLC report also found that the lack of third-party oversight allows servicers to pursue foreclosure instead of effective loan modifications that would benefit homeowners as well as investors. While credit-rating agencies and bond insurers do monitor servicers, their oversight too often encourages servicers to foreclose.
The NCLC report includes a detailed examination of loans in foreclosure from 1995-2009 and how components of servicer compensation affected the likelihood and speed of foreclosure. It also looks at the rise of the servicer industry as a byproduct of securitization, and the oversight of servicers by credit-rating agencies and bond insurers.
"The people who could change the way servicers are doing business -- Congress, the administration, and the Securities and Exchange Commission -- and the market participants who set the terms of engagement -- credit- rating agencies and bond insurers -- have failed to provide servicers with the necessary incentives to reduce foreclosures and increase loan modifications," Thompson said.
The report suggests that rule changes remove the financial incentives for servicers to block modifications and mandate loan modifications before a foreclosure as a matter of law. Until it does, the report says, the foreclosure crisis will continue.
"I feel that I have been set up to lose my house," Alesea of Kinston, N.C., told ConsumerAffairs.com. "Where is the justice in this?"
Related reading at ConsumerAffairs.com:
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