Why Is It So Hard to Modify a Mortgage?

Peter Goodman’s infuriating and important report about the impossibility of modifying mortgages raises an interesting question: why is it so hard? There are three possible answers, I think.

The first is that it’s sheer incompetence — the banks, at least at senior levels, have lots of good will, but they just can’t find the staff to get this stuff done.

The second is that it’s greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.

The third explanation is somewhere in the middle: that it was always difficult to modify mortgages, that the massive wave of loan-mod applications has made it harder still, and that banks just move slowly, even if they do have good will.

My gut feeling is that the reality is somewhere between #2 and #3. If loan mods really made sense for the banks, they would be better at it than this, and they wouldn’t make life so unbearably hellish for their borrowers.

Once again, this is an area where a regulator with teeth could and should step in. If banks claim to be working hard to modify mortgages, they should be tested on that claim, and held to account if it proves to be false. If the carrot of getting a reliable stream of future mortgage payments, along with $1,000 from the government, isn’t enough, then add a stick as well. Someone needs to fix the current broken system, and it won’t be the banks themselves.

Comments

[prairiedog555:]

It is difficult because no one wants to make a decision, all of this talk about the banks "loosing talent" is hog wash.

Jun 30 07:26 AM

[davidma11:]

Mortgage Modification via a Govt Mandate just another ponzi scheme!! Just wish I wasn't the funding source of this social experiment. The real issue is so many people haven't taken responsibility. I keep reading people complaining that live in Million dollar houses who can't make their mortgage payment. My question when did it become my responsiblity to make sure someone can live in a big house in a very beautiful place in the world. Do we owe our fellow American a 4/3/3 3500 sq. feet home? I healthcare is a legitimate concern, the housing crissis is a joke let the homes go into foreclosure.. I have always wanted a 2nd home near the beach.

Jun 30 08:46 AM

[Moose Shape...:]

healthcare is NOT a legitimate concern!

Jun 30 09:02 AM

[Aldebert:]

An additional reason (though I don't mean to suggest that this is the primary reason): if the loan has been securitized, the servicer of the mortgage may not have the right (under the securitization agreements) to modify it. E.g., if a 7% mortgage backs a 6.5% security with the remaining 1/2% going to the serivcer as its fee, if the loan were modified to lower rate, say 5.5%, the mortgage could no longer back the 6.5% mortgage-backed security as there would not be enough interest cash flow. If modified, it would have to be bought out of the security and treated as if the loan paid off. In this case, someone would have buy the modified loan out of the mortgage pool backing the MBS, a role most servicers do not play as part of thier servicing functions.

Jun 30 09:18 AM

[traden4alpha:]

These are good points, but what about answer #4? Perhaps very few mortgages and borrowers are actually suitable for modification. Unsuitable situations include:

1. The mortgage is underwater (that disqualifies many modifications in the hardest hit areas such as CA, AZ, FL, NV, etc.)
2. Borrower can't afford the modified mortgage (that disqualifies NINJA and now-unemployed borrowers)
3. The borrower can afford the unmodified mortgage (that disqualifies non-delinquent borrowers)

What's left is a very thin slice of the mortgage market. What percentage of mortgages represent an above-water mortgage with a financially sound borrower that can't afford the current mortgage, but could afford the modified mortgage?

Jun 30 09:28 AM

[kebu77:]

"Once again, this is an area where a regulator with teeth could and should step in."

No. Let principal home borrowers have the same bankruptcy rights as commercial RE borrowers and vacation/investment home borrowers now have.

The countervailing pressures thus created at the lowest level in the process, without executive government intervention, would cause the system to open up more (in ways we cannot accurately predict) and cause mods to happen that are (now, w/o access to bancruptcy courts) in the best interests of investors as well as home buyers (never call them "homeowners" until the note is paid off).

Jun 30 10:11 AM

[jackooo:]

When a house is purchased the fees will kill you. Environmental fees to check the soil were added to the cost of purchasing a house in Ca.

Jun 30 11:00 AM

[mderenthal:]

Traden4alpha and Aldebert nailed it. Look at the stats on the loan mods that have been completed and you'll see vast majority fail. I forget the exact numbers but I think its something like in excess of half of all loan mods are in default again w/in 9 months. And many banks are "negotiating" terms w/ upside down homeowners that should be criminal, that anyone w/ any lick of financial sense could tell you doesn't have a snowball's chance of creating a long term financial fix for either the bank or the homeowner. Why is this? Something called long term versus short term outlook is my guess. Same mindset that we're all now recognizing as having contributed to so much of the problems that we're all trying to find our way out of now. From what I'm seeing (residential RE broker in Florida working w/ a lot of upside down sellers right now) the banks are not doing loan mods w/ a 5, 10, or 30 year outlook, but probably something more like a 6 - 9 month outlook. Not an expert on this, but I'm guessing if banks can take steps (even if they lead to a short term fix) to keep a property out of the "non-performing asset" class on their books, it makes life a bit rosier for them for just a while longer. If loan mods were a truly profitable concept for them in the big picture, they would have already gotten better at it faster and we'd see loan mods taking place at a much faster pace. The idea that a $1000 payment from the gov is going to incent banks to push loan mods through faster is laughable. Makes my stomach hurt I'm laughing so hard (not really).

Jun 30 12:10 PM

[jazzme:]

I recently spent 2 months trying a modification with my own mortgage company, Citimortgage. What an experience. I spoke with at least 8 different people each with different explanations of how the newest gov't sponsored plan (the streamlined one) would work. Gave the same info several times over. Explained that I actually wanted to stay in my home and simply needed some help due to falling financial circumstances and property values. This took nearly two months time inclunding a "backlog" waiting for a computerized property value report. Which, when it arrived could not be used because "someone" had arbitrarily put another (lower) value in and "the computer" rejected the actual and higher one.No one knew who or why that had happened. After all this the last person I spoke with said that because I had enough money to make 3 months payments saved up I didn't qualify. I actually had told them weeks before about the savings that I had.Maybe I should have lied? No matter. This was a boondoggle that resulted in me missing a better interest rate with a broker while waiting during which time the rates rose to a point that was stepping back. They did send me to the "regular" mortgage dept who said they might do a refi for around $ 3500 or more in costs at a rate as high as I have now with a bigger payment. Oh and by the way my credit is perfect..750 score..all payments were on time..etc. I seem to be a model citizen. We just fall through the system unless of course we are stupid enough to pay the fees to refi. No business deserves to fail for incompetence or lack of customer care than the bankers/mortgage companys. We seem to keep rewarding them though.

Jun 30 02:00 PM

[THofler:]

Has Felix been "captured" by the mainstream media?

Maybe the banks would rather just have borrowers pay back the money that they contractually promised to pay back? We need to follow Canada & Australia with legislation that allows banks to go after the property and wages of dead beat borrowers.

Jun 30 04:14 PM

[REITBull:]

Look into the tax constraints around REMIC. If a servicer modifies a loan that does not meet specific criteria, the MBS holders can be taxed at the corporate tax rate instead of the tax rate for investment income (they are effectively viewed as originating a new loan which triggers the higher tax rate). This leaves servicers open to lawsuits from MBS bond holders.

Jun 30 04:29 PM

[Gregman2:]

It's overly complicated and too many people are needed to sign off at the servicer-lender end. It's not streamlined enough. It comes down to...who's going to take the hit, the borrower or lender. Allowing a bankruptcy court to decide would be the smartest way, but the mortgage lending lobby axed that. (It's a lot like the insurance carriers in the healthcare debate--they're actually causing the problem by perpetuating fee for service.)

Jun 30 04:45 PM

[Bolton Peck:]

During the last five years, thanks to subprime mortgages, I've paid over twice the interest I should have had to pay for this little house I bought. so in my case, I can pretty much tell people where to cram that 'you used deregulated mortgages to buy a house you couldn't afford' argument. Because not only did I afford it, I wound up affording a whole lot more than I was ever told I'd have to!

And, aren't mortgage backed securities a very big part of the trouble we're in now? I really don't have much sympathy for these investors right now. The government has already handed them a trillion dollars.

And as far as health care goes, I'm as good as my last day's work. Because if something happens to me in this, the 'richest' nation in the world, and I can't go out there in the shop and fix bikes-my family's done for. We'll be out of this house in a few months. The corporate world sure isn't doing my MBA holding, certification list as long as your arm spouse any favors either. She hasn't found work for nine months.

My situation is in no way unique, or special. Bailouts in the USA only really happen to the banks. I have a problem with that.

Jul 06 12:33 PM