Mortgage Modifications Strangled by Loan Servicers’ Lucrative Fees for NOT Doing Modifications
December 14, 2009 by Oliveros & O'Brien, P.C.
For the last two years many programs have been put into place to try to stem the tidal wave of foreclosures. The early efforts flopped for many reasons but mostly because banks and mortgage servicers had more incentives to AVOID doing mortgage modifications than to approve them. Mortgage servicers particularly receive many forms of additional fees through the processing and foreclosure of delinquent mortgages. This creates a huge disincentive for them to do modifications. There is some evidence now that the Obama Administration’s Home Affordable Modification Program (HAMP) is helping many more homeowners than earlier efforts. That’s because it at least directly addresses this problem by including some incentives to mortgage servicers to go through the trouble of processing modifications. But servicers’ fees continue to play a big role, and so anyone dealing with or considering a mortgage modification needs to understand them.
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For the last year or so mortgage companies and their servicers have been saying that a big reason that they have been making such slow progress on the huge national backlog of mortgage modifications is their lack of skilled staff to process these modifications. But there is now increasing evidence that the biggest reason for the slow pace of modifications is that these lenders and servicers have big financial incentives to AVOID doing them.
A large percentage of home mortgages are “serviced” by giant loan servicing companies. These companies are often subsidiaries or divisions of banks or mortgage companies. For example, EMC Mortgage Corporation is a subsidiary of JP Morgan Chase and America’s Servicing Company is a division of Wells Fargo. A few are independent, such as Ocwen Financial Corporation. They contract with the holders of large pools of mortgages for the right to collect the mortgage payments from the borrowers, and in return are paid servicing fees.
The servicers’ duties generally include receiving and accounting for the mortgage payments, paying the property taxes and homeowners’ insurance from funds collected from the borrowers, communicating with the borrowers about catching up on late payments, negotiating loan modifications, and processing foreclosures.
The servicers generally receive the late fees on the accounts, so they have a financial incentive to keep homeowner in a late-pay status. Many servicers make a substantial part of their annual profits through these late fees.
Servicers also receive fees for many of the steps in the foreclosure and re-sale process, such as arranging for appraisals, title searches and legal services. Not only do they receive additional fees, they have set up side businesses to do some of the necessary steps in the foreclosure process, such as title companies to provide the title insurance policies, to greatly increase their profits. For example, Ocwen Financial Corporation set up Premium Title Services for just this purpose.
On top of all this, the servicers typically receive the bulk of their fees based on the total principal amount of all the mortgages in the pool they are servicing. That means that any time a servicer approves a mortgage modification which reduces the principal amount of the mortgage, that reduces the servicer’s income— not just for that month and throughout the entire time that they service that loan. It’s no wonder that servicers have been dragging their feet on loan modifications.
The Obama Administration’s Home Affordable Modification Program (HAMP) of last spring was the first to attempt to address these perverse disincentives to mortgage modification. HAMP provides a financial incentive for each modification, and for each of the next three years that a modification continues to be successful. Some have sensibly argued that these incentives do not go nearly far enough to counteract the disincentives that have been built into the servicers’ contracts and business plans. But they seem to have had at least some effect since the volume of modifications has picked up, compared to the earlier programs that did not even try to address this.
In addition, President Obama has tried to put political pressure on the mortgage industry by meeting at the White House with industry leaders and trying to induce them to increase their modifications. Congress has also held hearings about whether HAMP is working and how the incentives could be improved.
And as the housing market has stayed depressed for longer than some had hoped, that bad news has a silver lining: some mortgage holders and servicers, who had been holding out for a relatively quick increase in home prices and so were avoiding mortgage modifications reducing principal, are now more and more willing to negotiate.
But still, pulling off a mortgage modification is difficult, time-consuming, and—sadly—often a wasted effort. It even depends, unfortunately, a lot on luck: whether your mortgage servicer or holder happens to be one which has dedicated the resources to hire and train the staff needed to process modification applications with at least minimal competence and on a sensible timetable.
You may have been turned down for a modification or have given up on trying. Or you may be paying your mortgage after a modification but are still concerned about making ends meet. The right kind of bankruptcy may give you just the right relief you need--instead of a mortgage modification or along with one. We can look over your whole situation and discuss your options with you. Although it is generally not cost-effective for us to work directly on mortgage modifications, if appropriate we can refer you to agencies which do. Our job is to serve nobody but you. Call us at 503-786-3800 to set up a free consultation with one of our attorneys. Or click on the “Contact Us” at the top of the page for other ways to reach us.
In: Housing