Homeowners in Trouble--Don't be an industry statistic

The Mortgage Bankers Association released a study this month that touts the efforts of mortgage servicers and lenders to assist borrowers. The industry asserts that it "took major steps" to "help those borrowers who could be helped." Therein, lies the catch. While apparently relying on self-reporting by mortgage servicers (an industry facing numerous accusations of misconduct (see here and here and here)), even assuming accurate data, the study's methodology gives a big boost to the mortgage industry. How? The study begins by excluding as beyond help all loans on properties that servicers could not confirm the house was occupied by its owner (18%). It also excludes all loans in which the borrower defaulted despite a previous payment plan (29%). Notably, there is no evidence on the parameters of those plans--were debtors given an extra week to cure their mortgages or were these serious modification efforts? Given what we know about modification efforts from public securities filings, there is no way 29% of loans would meet a strong criteria of previous repayment plan. Most disturbingly though, from a policy standpoint, the industry points the finger directly at borrowers. It excludes 29% of loans from the group where it asserts modification is feasible because the "borrower would not respond." In his post on the House hearing on the mortgage modification bill, Prof. Adam Levitin reported on a witness' testimony that families in financial trouble may not respond to phone calls or open mail from creditors. My advice to homeowners--talk to your servicer or open mail from them. Better yet, contact them affirimatively to ask for a loan modification and keep records of your efforts in so doing. Don't be an industry statistic! Beyond this practice advice, the fact that industry says it can't reach 3 in 10 borrowers has important policy implications--including for the fate of the bankruptcy modification bill.

Why? Because loan servicers are the intermediaries between investors/lenders and consumers, and this industry is neither reliable nor responsible. Servicers operate on a low margin, and under standard incentives, they don't profit from making extra efforts to help borrowers. In fact, servicers often get to retain as profit certain kinds of default fees, such as late charges. They also charge a variety of convenience charges, such as for receiving information by fax or email, most of which are incurred when a debtor is in default and wants to verify how much is owed or wants to refinance. Any voluntary plan for modifications or helping troubled borrowers will rely on servicers' technology, incentives, honesty, and outreach. If the servicers don't make robust efforts to contact debtors or if debtors are reluctant to work with servicers because of bad customer service in the past, the system won't modify as many mortgages as might make economic sense. As I see it, one of the real advantages of the bankruptcy modification bill is that customers don't have to rely on their servicer's cooperation to get a modification. A family could affirmatively initiate a possible modification by filing bankruptcy and proposing a cram down; it wouldn't be trapped on hold or unable to figure out who holds their note or hear contradictory offers for modification each time it contacts the servicer. These procedural problems hinder the substantive modification process, and bankruptcy offers a venue to force the servicer and the consumer to communicate about what is an economically feasible modification.

Comments

[Carl Somers]

It is an indication of just how irrational this system has become that the very companies that issued these loans would now be relied upon as the first line of assistance to borrowers in trouble. The bankruptcy modification bill is going to be necessary as these servicers are in many cases the reason that the borrower is in default in the first place. I would much rather trust the established bankruptcy system to produce a fair outcome rather than rely on any party that stands to gain financially from the borrowers predicament. It really is beyond comprehension that the country has not yet made the rational choice here. This problem is going to leave wounds on the nation that will be very difficult to heal.

[John R.]

If my past is any reflection of mosts present, then the trouble these Bad Mortgages, and the Company's that made them, has only just begun. I lost 9 properties back in the mid 90's to foreclosure (not my fault, long story for another venue). I did the right thing, filed Bankruptcy. I filed on the DOUBLE JUDGEMENTS the Courts gave to the Mortgage Holders, on the Court Fee's, and on every other thing I owed money on. A Chapter 7, complete & total. 11 Years Later, the Bank ( and Verizon Phones) that had financed my properties was still reporting that I owed them on the mortgages and even after I had sent out over 100 letters to the 3 Credit Reportng Bureau's and the Bank itself. The Bankrupty went away in 7 years, it took 12 to finally make te mortgages disappear. Trained in IT this has kept me unemployed FOREVER! It forced me into a sub-prime loan on the house I'm in now. Give it a year or so and watch, you'll start to see how screwed up the system really is. God Bless all of you that're losing your homes, but the misery is only just beginning.

[AMC]

http://www.marketwatch.com/news/story/lenders-agree-slow-down-foreclosures/story.aspx?guid=%7B5445B9DA%2DC350%2D4C92%2DB7C2%2D1EBF88751EB0%7D

Lenders agree to slow down foreclosures

Paulson: More needs to be done to stem housing crisis

By Jennifer Waters, MarketWatch
Last update: 1:05 p.m. EST Feb. 12, 2008

CHICAGO (MarketWatch) - In an unprecedented move aimed at halting a swelling and steady flow of mortgage foreclosures, six of the nation's largest mortgage lenders joined forces Tuesday to give all homeowners who are seriously delinquent on their loans another chance.

The lenders have agreed to freeze foreclosures for a month to give borrowers and lenders time to work out a repayment plan.

Named Project Lifeline, the initiative is a step-by-step approach for homeowners who are 90 days or more behind in their mortgage payments, a circumstance that already puts them in serious risk of losing their homes. These borrowers could begin receiving letters from their lenders as soon as this week.

The program is not a solution to the housing crisis but is considered a "pause" in the foreclosure process, giving homeowners an extra 30 days to work out a payment or modification program. Some 1.3 million home loans are either seriously delinquent - meaning 90 days or more - or already in foreclosure, according to the Mortgage Bankers Association.

The program gives the lenders more time - and presumably a better chance -- to work through the volumes of troubled loans they face. Many have indicated that they simply don't have the manpower to handle all the business.