Loan Mod

The Stealth Problem of Predatory Mortgage Modifications

If you look from 50,000 feet, there are two sides to the debate over mortgage modifications. On the one hand, a surprisingly large group, which includes beleaguered homeowners, mortgage investors and town and municipal governments, all favor mortgage modifications, particularly principal modifications. Their argument is simple. If you are dealing with a big enough loan, it’s always better for a bank to take half a loaf rather than none when a borrower gets in trouble. That’s why, historically, banks would quietly cut a deal with a stressed homeowner who still had a viable level of income and was committed to keeping his house.

Against them have been arrayed a peculiar band of moralists who argue that people who can’t pay their obligations should suffer, no matter how high the cost of this cut your nose to spite your face attitude is in terms of damage to home prices in the community and lost tax revenues. And in keeping with that, the press has taken up the “strategic default” meme, which perversely tries to depict lenders as victims of calculating borrowers.

The interested group that seldom makes its wishes known in public, of course, is the one that benefits most from this perverse status quo of “fewer mods than there ought to be” which is mortgage servicers. They aren’t set up to do mortgage modifications while they have set up streamlined processes for foreclosure. And they also get paid additional fees when borrowers are delinquent and enter foreclosure (many aren’t legitimate; as we heard from whistleblowers at Bank of America, foreclosure abuses and fee padding were endemic).

The foregoing means that modifications are always preferable and servicers need to be pressed harder to do more, right?

Not necessarily. Never underestimate the ability of banks to game a system.

Rest here…