Why mortgage modification programs aren’t working

We know how few people get their mortgages modified, despite government programs to encourage those modifications.  And we know how hard it is to get the lenders to modify any mortgages.  Now we have good evidence as to why these modifications are not happening.

A case from Reno, Nevada federal court, reported in the NY Times, tells us that the “lenders” we all deal with are often just the loan servicers, at least for the main mortgage.  They long ago packaged up the mortgage and sold it off to investors, keeping only a contract to do all the servicing of the loan.

Turns out that these servicing companies do not have much incentive to modify the mortgage.  They may own a second mortgage on the property, and they tend to get more fees for themselves by foreclosing.  So they refuse to allow the modifications, even when the investors, given a choice, would prefer that to foreclosure.

So, the investors who own the mortgage do better if the mortgage is modified, and the homeowner does better if the mortgage is modified, but the company they hired to service the mortgage does better if the house is foreclosed.  You’d think the investors and homeowner would win, but not in this case.

The court in Reno awarded $5.1 million in punitive damages to 50 investors who sued the servicing organization for breach of contract — that is violating the terms of the contract they signed when they sold the mortgages and foreclosing when they should have modified.  Let’s hope that other loan servicing companies pay attention to this case and this behavior is changed.

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