Wednesday, August 12, 2009

HAMP--Is It Really All About the Money?

Posted on Credit Slips by O. Max Gardner III:

Are mortgage servicers really refusing to modify mortgage loans solely because of all of the "ancillary fees" they can generate from a completed foreclosure? Is the problem really all about the money or is there something more to it?

The New York Times reported about ten days ago that the HAMP mortgage servicers were reluctant to engage consumers in modifications because the companies collect such lucrative fees on delinquent mortgage loans. There is certainly a substantial body of evidence to support the "lucrative fees" disincentive theories. For example, the Federal Reserve Bank of Boston recently shed some light on this problem with a new study that concluded that only 3% of the seriously delinquent mortgages had been modified due to the "the simple fact that the lenders expect to recover more from a foreclosure that from a modified loan." And, the number of reported bankruptcy cases where mortgage servicers have been sanctioned for imposing unlawful, illegal and unreasonable "collateral and ancillary fees" is substantial and perhaps monumental in their numbers.

As a consumer's bankruptcy lawyer, I have made a very good living filing adversary proceedings against mortgage servicers for the misapplication of mortgage payments and for the unlawful imposition of fraudulent legal fees and other charges. These fees include forced placed insurance, rolling or legacy late fees, property inspection and preservation fees, broker price opinion fees, statutory expense fees and just about every other type of fee or charge they can think of or you could ever possibly think of. And, since many of the servicers often own their own inspection, appraisal and insurance companies, the servicers can "double dip" and "double charge" for these "captive company fees while the foreclosure process drags on and on."

Consequently, why would I, of all people, write anything that could be to any extent considered inconsistent with the "greed theory" for deplorable lack of realistic mortgage modifications? Well, let me be clear, I do not intend to imply in any way that servicers are not motivated by the desire to create and capture as many of these so-called "ancillary fees" as they can possibly get away with in any case, foreclosure or bankruptcy. And, I agree with those who contend that in many cases the financial incentives for the servicers are totally inconsistent with the financial rights of the bond holders in a securitized trust.

The real problem for servicers is not just a desire to make more money but their almost total inability to comply with HAMP. The problem with the HAMP plan is that it fails to take into account the normal obligations of servicers under their respective Pooling and Servicing Agreements. In most cases, a servicer is obligated to advance to the Trustee for the securitized mortgage trust the monthly principal and interest payments for every loan that has defaulted. This can be a massive monthly financial obligation. Most servicers are not allowed to recover these "P & I Advances" until the property is foreclosed and then sold as Real Estate Owned (REO). More importantly, HAMP forces mortgage servicers to act as "full-document" mortgage loan originators. Most mortgage servicers have no experience, training or knowledge about how to originate a mortgage loan. Yet, this is exactly what HAMP is asking them to do. The $1,000 HAMP modification fee and the annual $1,000 success for performance HAMP fees do not even begin to cover the expenses the servicers must incur in order to fully comply with the HAMP "origination" rules. As a result, the so-called "financial incentives" for servicers to modify loans are totally unrealistic and fail to take into account how this system really functions.

Accordingly, in the final analysis it really is about the money but just a lot more and for different reasons than has been reported by the media. There was "no hope" for the "Hope Now" program and there is no chance to ramp up the HAMP.

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