Who owns your mortgage note? What is this “servicer” that keeps changing? Why can’t the bank just give me a break and restructure the loan so I can make lower payments over a longer period of time? The first two questions lead to the last.
The truth of the matter is that mortgage loans are a commodity. They are bought and sold all the time just like a stock or bond. There is nothing wrong or illegal with that, as long as the terms of the loan are not altered without your permission. So don’t be surprised to learn that Bank A, who loaned you the money to buy your home, isn’t the same entity seeking to foreclose.
Most of the time, the servicer is the problem
The servicer of your loan is a third party hired to manage the loan. To put it in modern terms, management of the loan has been outsourced to a company whose specialty is loan management, freeing the bank to focus on its primary business of lending more money (and making more money in the process!) The servicer makes its money based on how much work it puts into managing the loan.
Part of managing a loan is foreclosing on delinquent loans and negotiating loan modification. Loan modification can take several forms. The homeowner can pay interest only for a period of time. Another option is to reduce the monthly payments. In either of these options, the payoff date would be extended accordingly. Other options abound. Note that the lender loses no money in either of these options.
Follow the money…
So if that’s true, why won’t they allow you to modify your loan? In a word, money. The servicer makes more money by foreclosing than by modifying the loan.
You say that doesn’t sound right? You are right. It’s not. Example, a homeowner owes $250,000.00 on a home that will only bring $200,000, if sold on today’s market. If the servicer forecloses, the bank (the investor who owns the note) will lose $50,000, plus legal costs, attorney fees, fees earned by the servicer, realtor commissions, home owners dues, property taxes, costs of repairs, and so on. (You can see the real loss may be more like $75,000 or higher.) And this is only if the home will sell. By modifying the loan, the homeowner retains ownership, and the costs associated with modification are relatively minimal. The economics of disallowing mortgage modification is maddening–just plain irrational and downright crazy.
HAMP (Home Affordable Modification Program) is a government program designed to encourage lenders to modify loans so that financially strapped homeowners can remain in their homes. More on this in a future post. We’ll also discuss how the lending industry has committed widespread fraud by forging documents by using “robo signers.”