Mortgage Companies Make More on Foreclosures than They do Modifying Existing Loans

According to Diane E. Thompson of the National Consumer Law Center, homeowners, lenders and investors usually lose money when a home forecloses but mortgage servicers (those that manage mortgages and collect mortgage payments) do not. She says:

“Servicers may even make money on a foreclosure. And, usually, a loan modification will cost the servicer something. 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 National Consumer Law Center argues that mortgage companies have more incentives and reason to foreclose on homes when homeowners have difficulty making payments than they have reason to modify the loan. Thompson indicates that this comes from the ability of private rule makers to decide how the servicer can account for potential losses and profits. According to data from the Inside Mortgage Finance publication, more than 2/3 of mortgages issued since 2005 have been securitized; and private rule makers have great influence over securitized mortgages owned by investors. In this situation, a servicer can manage the mortgage from the collection of the monthly payment to the foreclosure proceedings and have the ability to decide whether a foreclosure or loan modification is “in the best interest of the investors” of the mortgage.

According to the Huffingtonpost :

When a homeowner is delinquent on a mortgage that’s been securitized, the servicer must front the late payment to the investors. When a home is foreclosed, the servicer is typically first in line to recoup losses. But if a mortgage is modified, the servicer typically loses money that isn’t necessarily recoverable. That’s part of the reason why the Obama administration created a $75 billion program to limit foreclosures. The money is to be distributed to servicers who successfully modify home loans, with the hope that the incentives to modify outweigh the incentives to foreclose.

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on October 23rd 2009 in Mortgage News

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