Posted on the Housing Wire by Jon Prior:
Mortgage servicers have found it cheaper to foreclose on homeowners than offer loan modifications, according to a new report from the National Consumer Law Center.
The report points out servicers in charge of modifying distressed loans are separate from the lenders, who have packaged the loans and sold them in pieces or pools to other banks and investors.
“In the majority of cases, servicers have nothing to do with what’s in the best interest of those investors,” said Diane Thompson, the author of the report and attorney at the NCLC. “We figured this out by following the money, by following who plays what role in all of these business transactions and who gets paid what for doing what.”
Financial incentives encourage servicers to pursue a foreclosure in lieu of a modification, which costs the servicer upfront money in fixed overhead costs, and out-of-pocket expenses such as property valuations and credit reports, according to the report.
“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,” according to the report.
The report details servicing fees, such as markups in broker-priced opinions (BPOs), that provide incentives to delay a foreclosure and even partly explain a servicer’s reluctance to enter into a short sale, according to the report.
A servicer would profit from a short sale only if the servicer’s financing costs outweigh the foreclosure fees charged and if the short sale processes faster than foreclosure, according the report.
“If you read these servicing agreements and prospectuses, you can see that there are a bunch of different people who own the loans, and you can see that the servicer doesn’t hold much if any interest in what happens to the loan as a whole,” Thompson said. “And the way that a servicer gets paid entirely pushes the servicer to proceed with a foreclosure and not to do a loan modification.”
Download report here.