Loan Modification - Why the Servicer was Required to Turn You Down

The most recent development of the Obama administration's Home Affordable Modification Program (HAMP) has been more bad news. Although more modifications are being accomplished on a cumulative basis, fewer than 10% of the borrowers who qualify for a foreclosure solution under the terms of the program are given one by the mortgage servicers and lenders. While this seems like a poor result, it should have been predicted.

One big roadblock for any loan modification plan is the pooling and servicing agreement (PSA). This is the agreement that dictates terms regarding how mortgages are pooled, securitized, sold to investors, and then serviced by other companies. And one of the terms many of these agreements contains makes it almost impossible for certain homeowners to be offered a modification.

In fact, some pooling and servicing agreements state that no more than 5% or 10% of the mortgages contained in the pool can be offered loan modifications in the case of default. So the US Treasury Department, in reporting that 9% of homeowners who qualify for plans have been given modifications, is simply reporting information that could have been estimated just by examining the structure of the mortgage industry.

These PSAs set a limit to how many mortgage modifications can be offered by servicers, and these companies may face liability from the trusts or investors that own the underlying loans if they offer too many workout plans to borrowers. They may find themselves in breach of the servicing terms they agreed to, even if it would allow more homeowners to avoid foreclosure, and they are not willing to take this risk.

This is one of the problems of the government getting involved in the mortgage markets. While it can appropriate $75 billion to effect more modifications, it has not changed or interfered directly in the PSAs that limit the number of such programs that can be offered to defaulted borrowers. Thus, the government is encouraging lenders to offer more plans than the legal, agreed-upon limit in the PSA.

If the lender has hit the limit in the number of loans it is allowed to modify, the mortgage may have to be removed from the pool in order to assist the borrowers. If this is the case, the owners may have to get a copy of the pooling and servicing agreement to find out what the servicing company is instructed to do for loss mitigation and how the mortgage security is constructed.

Especially in cases where the borrowers are having difficulty negotiating a loan modification or other solution to foreclosure, it may be helpful to examine the PSA. These agreements sometimes outline how companies are supposed to proceed in cases of default and where loss mitigation efforts would allow the borrowers to keep their homes. Having a competent attorney review the PSA could be extremely effective.

For securities that have been sold publicly, as many have, the PSA will be available through the Securities and Exchange Commission. Searching the SEC's website can provide the actual language of the PSA for homeowners to examine. What the borrowers must find out is the name of the trust in which their mortgage loan is located. This information may be found by submitting a request to the mortgage servicer.

When these limitations are placed on servicing companies, both borrowers and investors in real estate securities suffer. Of course, not every mortgage will be modified and not every modification will be successful, but it makes little sense for homeowners to be shut out of the process just because other homeowners defaulting first and the restriction imposed by the PSA has already been reached.