Whats wrong with the Obama’s Loan Modification
The Obama administration’s plan to modify defaulted mortgages to stem the tide of foreclosures gripping the country has not lived up to its own standards to say the least. The reason for that is that the set up is fundamentally flawed and failure is inevitable for one simple reason, mortgage companies are more likely to foreclose on homeowners than modify their loans because they make more money off foreclosures, argues a new report by a consumer advocacy group.
Servicers may even make money on a foreclosure. Usually, a loan modification will cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed. The fundamental flaw is that when a homeowner is delinquent on a mortgage that’s been securitized, the servicer must front the late payment to the investors. When a home is foreclosed, the servicer is typically first in line to recoup losses. But if a mortgage is modified, the servicer typically loses money that isn’t necessarily recoverable.
Servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid. The rules for recovery of expenses in a modification are much less clear and somewhat less generous.
Until this problem is addressed, the modification program iniated by the Obama Administration will not function at its potential, and ultimately will do very little to stop foreclosures.
Posted by George Beckus Esq. 12/16/2009.
