Five months ago, the Obama Administration released a program that was supposed to reach up to 3 to 4 million at-risk homeowners by providing mortgage servicers with incentives to offer loan modifications.The Treasury released its Servicer Performance Report through July 2009, showing that out of an estimated 2,705,302 eligible borrowers more than 60 days delinquent on their home loans, only 9% or 235,247 have even received trial modifications. When you add in the number of eligible borrowers that are less than 60 days delinquent, presumably, the number would be even lower. Add in the number that have received final modifications, and well…you get the idea.
While that is just one theory as to why modifications are not being offered, the numbers in the newly released report don’t lie. Loan modifications are happening at an abysmally low rate. Foreclosures march on, the economy remains in shambles, and servicers collect fees. Democrats are rattling the sabers — by talking about reviving the cramdown bill. Article. Politicians talk, the industry does what it wants.
Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.
The opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.
“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.
Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”
But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.
When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.
Data on delinquencies reinforces the notion that servicers are inclined to let problem loans float in purgatory — neither taking control of houses and selling them, nor modifying loans to give homeowners a break.
From June 2008 to June 2009, the number of American mortgages that were 90 days or more delinquent soared from 1.8 million to nearly 3 million.
As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.
Fees are embedded (under the radar) in complex sales.
Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, say experts, allowing distressed houses to decay and fall in value — a fact of little interest to the servicer.
At the end of the day, it doesn’t matter what the house sells for, because they don’t take that loss. Meanwhile, they are collecting all these fees.
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