Loan modifications seem like a great solution for lenders and borrowers. If you can’t afford your payments, then stretch out that loan and make lower payments rather than saddling a lender with one more property in the REO- and foreclosure-property tsunami. However, in reality, a recent congressional oversight panel report indicates that even when loan modifications appear to be “economically rational,” lenders simply are not making the mods[1]. According to the report, there are some practical – and initially overlooked – problems with the concept that make lenders loathe to modify loans unless they are faced with public pressure or other incentives.
For starters, lenders have to recognize modifications as immediate losses on their balance sheets – and balance sheets are not an area of great flexibility for lenders right now. If a lender does not modify a loan, they have some discretion about when they post the loss on the property. Loan mods post as losses immediately and at the beginning of the trial period. Given that the overwhelming majority of attempted modifications fail, non-performing loans are actually better for banks’ books!
Additionally, lenders face unclear court rulings when it comes to how modified loans “place” in lien priority. In fact, second loans have the potential to supersede the first depending on how principal balances, missed payments and fees line up. Because lenders cannot be sure what they stand to lose, modifications look less than appealing. Particularly when you factor in that there really are not a lot of incentives for lenders to participate in HAMP or any other loan modification program, it’s actually pretty easy to see why loan mods are not that attractive to lenders in general.
It is possible this could change if foreclosure becomes less of an option in the wake of the recent Massachusetts Supreme Court foreclosure ruling on Wells Fargo and US Bancorp. Do you think that loan modifications should be more of a priority for lenders?
Thank you for reading! Your comments and questions are welcome below.
[1] http://www.bankrate.com/financing/mortgages/why-lenders-nix-loan-mods/
I talk to people all day that can’t afford their home payment. After they request a Mod they are shocked that they do not fit in the “Sweet Spot”. Many homeowners just redefault even during the trial period. I say lets get the inventory out in the market and get this over with. Sure we will experience severe depreciation but that will be the road to recovery.
As I have stated here and other places, loan mods are not going to happen until several regulations and tax laws are changed!
For those naive people thinking it makes more since for a bank to do a loan mod than a foreclosure, it is because they have very limited understanding of the tax laws in this country, and even less understanding of the regulations banks have to deal with daily!
As pointed out in this article, loan mods often cost the bank more than a simple foreclosure, are incredibly hard to defend in bankruptcy court and are a regulation nightmare, despite what the Obama administration tells people.
Most, if not all, new regulations and programs dealing with foreclosure are simple smoke screens put in place to garner a few votes and hide the total incompetence of Fannie, Freddie, HUD and the like. The main reason many “experts” and “professionals” are in favor of the some of the new laws/programs, is an attempt to cover their own a$$ because they have helped screw things up so severely this far.
Get serious about learning what is happening, and why it is happening, as this article is pointing out.
Loan mods cannot be a priority until several tax, bankruptcy and lending laws are changed. Why do you think it takes so long to get some kind of answer on a loan mod? It is an almost impossible morass of laws to attempt to work through before a decision can be made for one. The other part is simply because the mod will not make any difference for the borrower, they still cannot afford the property!
I think this issue might require just a little more clarification of the structure of the modern mortgage market.
Loans today, and for the past 15 – 20 years are not held by the Banks that originate them.. they’re bundled into groups of thousands (mortgaged Backed Securities (MBS) and entered into “Truats”, and these trusts are then sold off as stocks on Wall Street. Most everybody knows about this today. But understanding the Trusts structural requirements is something a lot may be interested in.
The Trusts are Ruled by a document called the “Pooling and Servicing Agreement”(PSA’s). This Document outlines each and every activity that the “Servicers” (those who administrate the trust (Trustee’s) are empowered to do. In many, actually most of these PSA’s there is no method TO modify these loans. Either through ignorance or intention, the mortgages held by these Trust cannot BE modified by the terms of the Trust.
Now this leaves only the option of the originating Banks pulling back the loans from these Trusts, which when sold virtually guaranteed a specific interest rate of return to it’s investors (pension funds, sovereign wealth funds, Federal Employee Retirement Funds, etc., etc., etc.. Pulling these mortgages from the trust would cost the Banks money. Lot’s and lots and lots of money. More money than they have! Securitization was designed at it’s inception BECAUSE the Banks couldn’t afford to make as many mortgages as were needed in this modern day of homeownership. They just didn’t have the capital to do it.
So the trusts were set up and stocks were sold BEFORE the loans were made! This is how the Originating Mortgage Companies funded the mortgages in the first place. They used none of their own money, they used the Trusts money. All legal, the securitization process just works that way.
Typically, when a loan went bad, these PSA’s were written so the the Lender could (at THEIR discretion) pull back the failing loan and replace it with another like kind mortgage. Nowadays there’s just so many going bad, that the Lender’s, who aren’t REQUIRED by the majority of the PSA’s CAN’t take them back… there’s no replacement mortgages and it would Bankrupt the Banks!
Typically, since the 2008 crisis hit, and relating to those mortgage modifications that have already happened, to my own best knowledge, these have been only modifications where the “Servicers” of the Trust’s have actually contributed in part to the homeowners monthly mortgage payment (this satisfying the requirements of the Trusts), thus lowering it, to give the impression to the public that the Banks are actually doing some good for their customers. Of course this payment write down doesn’t last forever and the remainder, plus the amounts the Servicer’s contribute, of the contractual original mortgage are added to the back end of the mortgage, in some cases, after allowing the homeowner a few years of “breathing room”, but, in some cases actually raising the “longer term” monthly payment to an even more un-affordable payment amount than it previously WAS.
This has been cited for the many loan modifications that have already failed. Think of it. You go through the horrible process of foreclosure on ly to be forced to go through the horrible process of loan modification only to find out in the next 5 years your payment is going to be even higher than it was when you got in trouble in the first place!
Kinda takes the wind out of your sails… don’t it?
google FDIC loss sharing agreements and you will see why the short sale is dead in the most depressed areas and why the loan mod is rejected.. The investors were made almost whole.. It is better to Foreclose than to work with the borrower.. Just get this over with.. Start foreclosing and drop the prices and a bottom can actually be put in vs propping this market up.. The govt is propping the stocks and real estate and banks and the bonds and keeping interest rates suppressed.. The fed owns 1+ trillion of MBS..
It’s gonna be a long time..
Banks/Mega Investors are not fools which is exactly why they don’t want to do the mods. As the article explains, it does not make economic sense since the negative impact to their balance sheet is not immediate. Not to mention there are actually tax advantages for them when they go to foreclosure. They are then able to expense out many costs that appear during the foreclosure process. This provides a nice steady stream of smaller losses to write off against profits. Non-performing assets.
We are finding here in Chicago, that in one area alone, there are over 100 properties that the banks have abandoned in mid-foreclosure. This often after the owner has attempted to do a loan mod or a short sale without success. These homes are sitting in limbo. Remember, that the bank does not own the home they only own the debt. Meanwhile the community gets stuck with a property that has been abandoned by the mortgagee who believes that the bank is taking their home, taxes aren’t paid but the bank has no liability for those taxes. The properties will end up being sold for property taxes. With no real ownership change until the property is picked up for taxes. This allows the bank or actually the end investor which is usually not a bank, to carry this asset on their books as a non-performing asset not an actual loss.
Don’t forget, property taxes are a primary source of operating revenue for our communities. In most they are the source of education dollars. So while everyone wants to scream about the mis-management of our tax dollars, they miss the fact of how the banks/mortgage investors are shirking a moral obligation to the community by depriving them of primary funding dollars. So once again it is “joe average citizen” getting it stuck to them.
When you complain about what the government is doing, remember that it is made up of representatives we elect to represent our best interests. When “joe citizen” doesn’t have the contributing power to monetarily compete with the corporate/mega investor/banking interests, the legislation passed, will be skewed in that direction. If you want to see your government work for you then it’s time to rally for publicly funded elections with short election cycles and real debate of the issues. Negative ads need to immediately disqualify a candidate, no matter who runs them campaign or other. The biggest blow to the American Citizen came with the ruling last year by our activist supreme court, with the” Citizens United”, giving first amendment, free speech rights, to corporate/special interest groups. This decision allows for unlimited cash to be poured into media advertising without even the need to give complete disclosure as to the source of the funds. Look at the campaign trash we just witnessed.
No Gregory, banks/mega investors are not stupid. They play they game by the rules they paid to have made. This last election gave the results that the huge corporate ad campaign could buy! Follow the money!