Why Are Loan Modifications so Rare, Despite so Many in the Process?

For mortgage lenders, there is every incentive to negotiate with homeowners for a mortgage modification or other solution that will prevent foreclosure. Thus, the very few number of borrowers who end up receiving any help should surprise everyone. If banks and servicers have so many reasons to offer loss mitigation options to homeowners, why do so few of them end up with a reasonable plan to save their homes?

In many cases, the pooling and servicing agreements (PSA) that cover mortgage securities and the servicing of payments require companies administering loans to engage in loss mitigation. Furthermore, the negotiations have to be meaningful, as foreclosure of the property should only be used as a last resort and should be avoided unless there really are no other options. But servicers often engage in entirely worthless negotiations.

In fact, a large and increasing number of loans are covered by such requirements to engage in meaningful negotiations with borrowers in default. The following is a list of mortgages that should be mitigated:

• FHA loans
• Fannie Mae and Freddie Mac loans
• Loans where mitigation is required under the PSA
• Lenders which took bailout money under the Financial Stability Act

The fact that so few homeowners end up with any reasonable solution to repay their loans, even when they are financial able to do so, indicates that servicing companies are either negligent or malicious in continuing to pursue foreclosure in some cases.

Banks and servicing companies also change the guidelines for a completed loss mitigation package from week to week, it seems. There is always someone else who has to be sent the paperwork, a new fax number for the loss mitigation department, a lawyer who has to be contacted for updated numbers, and so on. What homeowners go through just to ensure their package of personal financial documents has been received by the lender is often an exercise in patience and frustration.

It is not just homeowners that become frustrated at the process. Even judges and regulatory authorities are hearing more often about cases in which banks drag their feet, never return phone calls, refuse to offer solutions, and simply proceed with the foreclosure. This is despite many security or servicing agreements requiring loss mitigation, and banks receiving money from the government to do modifications.

With all of the money that has gone to the banks, supposedly to provide foreclosure help and stabilize markets, it is astounding that there is such a high level of incompetence in working with borrowers. If the problem all along has been a weak housing market and too many foreclosures, the simple act of providing loan modification plans to borrowers who can pay back their loans should be relatively easy to accomplish.

Of course, not every homeowner will qualify for a modification, repayment plan, short sale, or other reasonable solution, but every homeowner should be given the opportunity to explore options. If foreclosure is considered a last resort to satisfy a mortgage loan, and servicers are required to negotiate with borrowers, then the cases of lost paperwork or confusing guidelines should be far fewer.