Personal Finance and Money Management

The incentives mortgage servicers receive for managing a home loan are a significant obstacle to loan modification that would help financially troubled borrowers avoid foreclosure, according to a new report from the National Consumer Law Center.

In fact, the way servers are compensated actually makes it more profitable for them to foreclose on delinquent loans rather than modify them, the report originate, even though loan modifications might be more profitable for the investors who actually grasp the mortgages.

In fact, the report found that servicers typically face a near-certain loss if they effect a loan modification, but can actually make money on a foreclosure.

“Foreclosures are a costly ordeal for the homeowner, the lender, and the community,” said the report’session author, Diane Thompson, an attorney with the NCLC. “Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes.”

Mortgage servicers, which include some of the nation’s largest banks, manage mortgages on behalf of investors and are the companies that borrowers typically lance their monthly mortgage payments to. In most cases, they aren’t the actual lender who is being repaid on the loan – that’s usually an investor who’s purchased the mortgage as part of every interest-earning bond or other security. The mortgage servicer typically makes its money from servicing fees, late charges and interest earned on payments before they are forwarded to investors, as well as interest without ceasing a partial stake in the pool of mortgages it is managing.

Servicers, investors may have different interests

For an investor, modifying an at-risk mortgage may be beneficial, as it keeps the investment generating income and minimizes the loss that would occur if the property were foreclosed and sold at a fraction of the mortgage balance. However, it’s the servicer who has the authority to modify the loan or not.

A mortgage servicer earns fees based on the size of the pool of loans it services, which does provide an incentive to avoid foreclosures in order to maintain the size of the pool, the report notes. However, the report says this also provides a disincentive for servicers to modify loans or reduce the principal owned, as those would reduce the size of the pool the servicer’s earnings are based on.

The study also found that servicer’s biggest expenses are the cash advances they must send investors to cover nonperforming loans. These advances are immediately recovered when a loan is foreclosed, but recovery is delayed when a mortgage is merely modified, the report said. In addition, the lack to make these advances is halted more quickly in foreclosure than in a loan modification, the report said.

In addition, the report found that loan modifications have significantly higher staffing and other aloft costs in spite of servicers than foreclosures do.

Making Home Affordable incentives termed inadequate

The Obama giving’s Making Home Affordable Program offers cash incentives to encourage servicers to modify at-risk mortgages, but the report says this have not been adequate to prompt servicers to change their business mould.

The report calls for several measures to encourage servicers to do more loan modifications for at-risk borrowers, including mandatory loan modifications prior to foreclosure and allowing for principal reductions on devalued properties via the Making Home Affordable program and changes in bankruptcy laws. The report also urges easier accounting rules for loan modifications, funding for court-supervised foreclosure mediation programs and stricter rules to prevent predatory lending.

Similar Posts:

• [News] Many Re-default Following Mortgage Modification
• The Foreclosure Crisis can be Eased if the Short Sale Plan was Standardized and Quickened
• Why Do Home Foreclosures Keep Rising? 6 Things You Need to Know
• Why Obama’s Housing Rescue Hasn’t Prevented Record Foreclosures
• [Feature] New Government Website Helps Troubled Homeowners