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Loan Modification Quality Matters

posted by Tara Twomey

Yesterday new foreclosure and loss mitigation data was released by HOPE NOW in its "Loss Mitigation National Data July 07 to November 08" and by the OCC/OTS in their "Mortgage Metrics Report."  Combined the reports show a steadily increasing number of loan modifications and a slight decrease in foreclosures.  That's the good news.  The bad news is a large number of loans that have been modified are redefaulting.  The OCC/OTS report shows 37% of loans were 60 or more days delinquent after six months.  Here's an example to put this in real numbers.  The HOPE NOW report shows nearly 870,000 loan modification in 2008.  Using the 37% redefault rate means that  just over 317,000 borrowers will enter the foreclosure pipeline again within 6 months.  

The reasons that borrowers are falling back into default is the source of much debate.  Industry representatives claim that every modification is affordable when it is made and borrowers redefault because their circumstances change.  Consumer advocates argue that servicers are not creating long-term, affordable loan modifications.

Whose side does the data support?

Here's the rub.  The data provided by industry is practically useless in determining the quality of loan modifications.  For example,  OCC/OTS defines a loan modification as a "Mortgage for which terms of the loan are contractually changed with respect to interest rates or other terms of the loan."  HOPE NOW's definition provides: "A modification occurs any time any term of the original loan contract is permanently altered.  This can involve a reduction in the interest rate, forgiveness of a portion of principal or extension of the maturity date of the loan."  Under these definitions a three-month rate freeze and a life-of-loan interest rate reduction are both counted as loan modifications.  Similarly, the capitalization of arrears, which increases the principal balance, and principal forbearance or forgiveness both fall in the loan modification box.

The best publicly available data that we have comes from Prof. Alan White.  His most recent analysis shows that "[o]nly 35% of modifications in the November 2008 report reduced monthly payments below the initial payment, while 20% left the payment the same and 45% increased the monthly payment."  Prof. White also notes that many of the modifications being made are temporary (5 years or less) and that some include balloon payments or other negative amortization features that will be problematic down the road.  With this quality of loan modification, it is not surprising many borrowers have already redefaulted or that more borrowers will redefault in the future.

Industry has focused their attention on increasing the quantity of loan modifications, but resolving the foreclosure crisis will take more than higher loan modification numbers.  If we want to keep families in their homes, loan modification quality matters. 


Let me preface by saying that I've *never* been a fan of, or at all impressed with, "HOPE Now" - OR FSA Secure for that matter. Try running the third party servicer members of "HOPE Now" through PACER, Lexis or Justia and see just how much litigation exists against each of them. I would be willing to bet all of the money in my pockets at the time of this posting against all of the money in anyone else's pockets that the numbers would be a concern for any industry nevermind the mortgage industry. This can't simply be whitewashed by the "Litigation happens in this industry." mantra because I would be willing to bet that the majority of homeowners bringing litigation can barely afford to do so.

I find it interesting that any of the talking heads covering the topic find a 37% redefault rate acceptable in any manner, shape or form. It's also curious that that figure is nearly identical to Fairbanks Capital's 40% portfolio default claim when they were settling USA/Curry.

Once again, part of this problem leads back to securitization - specifically the manner in which the PSAs are negotiated. I would be extremely interested to see statistics focusing on just how many of those 317,000 loans 1.) were securitized 2.) of those numbers, how many of them had terms in the PSAs that awarded loan modification fees to the servicers as "additional servicing compensation" 3.) who the top five servicers are that are making the most modifications and how their profit margins reflect this. Servicers are making an absolute killing on fees throughout the modification process. They reset the clock by making a "modification" that allows the loan to remain on "life support", start collecting even MORE late fees within six months and then have the gall to blame the re-default on the borrower when the modification should have been significant enough to stabilize the loan? Sorry, I don't buy it.

As long as servicers bottom lines are tied directly to default rates via "additional servicing compensation" - i.e. late fees, modification fees, assumption fees, etc. - John and Jane Q. Homeowner simply do not stand a snowballs chance of being treated fairly. Where are the figures showing that every homeowner who has "re-defaulted" on a modification did so because they experienced yet another negative change in their circumstances?

"If we want to keep families in their homes," MORTGAGE SERVICING QUALITY MATTERS ! Six months is more than enough time for servicers to ramp up piling on their bogus fees all over again. The two servicers Prof. White mentions, Litton Loan and Ocwen are widely known for egregious servicing tactics such as phony late fees and BPOs, force placed insurance, tax escrow malfeasance, all calculated to manufacture bogus defaults. Personally I think a lot of the press spin surrounding mods is "do good cover-up" for mortgage servicing fraud which must be effectively prosecuted and stopped for real recovery to even begin. I'm tired of mortgage servicing "no admission of guilt" settlements. They not only accomplish nothing for victims but when all is said and done the servicing fraud band just keeps playing on.

The loan mods I have been seeing for the past 3-4 years only have raised payments. Its just as complicated as originating and closing on a whole other mortgage note. Servicers suck at modifying mortgage loans. I knew that I knew that I knew that "Hope" would not amount to much. A lot of those type of predictions came from this blog. I heard on the news the other day some ridiculous figure have not modified.

the recedivism rate is in-line with historical averages over the past decade as loss mitigation techniques have grown in use. should this be surprising? prior to 2006, the majority of problem mortgages were due to one of the 4 Ds -- death, divorce, disability (medical expenses), or distress (loss of job). usually, these were temporary events and about 50% of delinquencies could get back on their feet in about a year. hence, the primary mitigation manner was adding the delinquent principal, interest, and fees on to the back-end of the note (or new seperate note). also, there was some positive equity (downpayment and appreciation), which allowed a sale if the borrower could not cure. positive equity also means the lender will likely not forgive principal.

today, circumstances are vastly different. most delinquencies are not from the 4Ds as many delinquent borrowers never had enough income to service the debt when it reset or recast (economic delinquencies are only just starting). so the traditional loss mitigation techniques will not work. most loans will require a substantial reduction in principal and interest rate for the borrower to service the debt in a consistent manner. a reduction in principal or rate means the lender sufferes an economic loss; hence, the lender will proceed cautiously with this decision. the lender has to find the point where they maximize value by properly documenting the cash flow/income of the borrower and the value of the property. this is why bailout bair's refrain of systematic modifications is simply impossible. these all must be done on a line-by-line basis. the fdic will find this out the hard way at indymac.

heretofore, most mods have probably not included any meaningful principal reductions. when this principal reduction starts to happen in a meaningful way, particularly when tax dollars are used to bailout or cover the losses that lenders/servicers/investors should take, is when the silent majority (90% of mortgage debtors that are current) will start to raise their voices. it might not be far fetched to see major protests when this happens.

Loan modifications or resets that are intended to help consumers are not going work fully until someone or somebody understands the axiom that "consumers live pay day to pay day". What would help, in my 40 plus years of credit and collection experience, is when modifications occur set the repayment terms based on the payday(s) of the consumer.If, for example, a consumer is paid weekly the set repayment amounts based on 52 weeks rather than monthly.

Attorney Twomey,

Off topic so if there is a better place to discuss this I'll be happy to redirect.

I was curious - while you were handling Maxwell v Fairbanks did anyone realize that Opportunity Funding was actually a subsidiary of Fairbanks Capital Corp? Would it have made any difference in the prosecution of the case as far as charges brought i.e. conspiracy, etc....

Good to see some of the posts from Mike Dillon,Blossom and Patches. Hope you had a Merry X-Mas. Maybe even have a Happy New Year.

The problem with the modifications is that they don't hold the lender responsible for the fraud they perpetrated against a homeowner to begin with.

Nor do they rectify bad attorney representation
Poor Judges

The judges are letting them off. They'll give them BILLIONS instead of helping one who has people who may just be able to help bail out the homeowners against their corruption. Yes I'm burned!

I've been fighting for every homeowners rights as long as I've been in this industry. I really don't know why we even have any federal guidelines you know our Constitution, the FDCPA, Fcra or any of it. They'll still just lie and steal to cover their own club of thiefs. But go out and steal or harm someone and you'll be jailed. They lie about you and disrespect you and get by with it...

I'll never believe in any justice system anymore. Nor will I endorse use of their private credit for anyone. The name is real. I've done my best to document the truth as it's happened in my life but now I'm just a deadbeat right?

I refuse to be silenced. What gives the right to anyone to remove pages from my complaints? They've done this in their attempts to discredit me. If there was something they didn't like they could of just blacked it out...But no they just remove pages of evidence of their theft in my case.

So since this is the site it is can someone please tell me what you would do besides speak the truth?

If a company lies about their capability to sell mortgage notes for one of the largest banks in the world shouldn't they be held responsible?

If someone commits mortgage fraud against a homeowner shouldn't the truth even be considered? And see if the mortgage broker created fraud against other homeowners as well?

If an attorney outright lies about the fraud that's been created against you shouldn't they be dis barred for furthering an attempt to discredit you?

If a judge makes a ruling and only happens to have a certain time limit to do an appeal to that judges order and doesn't do it shouldn't they be held responsible?

I know most won't have the answers. Its quite sad what people are going thru. Even if you have people that could help you do something different no option is given to recitfy except the stealing of your home. Even if you have people that could spend $150k to billions a month....


A large number of loan modifications are on alt-a and option arm loans, which have high margins that cause payments to spike when the loans reset or recast.

If servicing lenders want to reduce defaults on these loans, why not offer a simple modification of the note to substantially lower the margin, even before the loans reset or recast?

That sounds simple enough. Why don't they? Truth is, Servicers are rarely that proactive. I would venture to say that even if they did offer those kinds of modifications (“simple” being a relative term here), they would never be able to handle the volume. I agree with you though “Ditech”, if they did it would be a good fix or at the very least soften the over all blow.

Most of the time though the servicers will not even talk to you unless you are already behind on payments.

Words from a Very Outspoken and Opinionated California Litigation Attorney

Here in California, our Department of Real Estate website (dub dub dub dot dre dot gov) lists the companies that have DRE "permission" to modify loans... add to this list any licensed California attorney, and that is where you should begin your due diligence search when you seek help in California. Other states probably have similar laws, so check with your own state DRE and state bar.

My law firm has been getting more and more calls recently from homeowners that were victims of predatory lenders who put them into an unaffordable loan and now fell into the hands of those same people who sold the toxic loans but profess to be saviors... DON’T BE A VICTIM TWICE! What’s that they say, “Fool me once, shame on you, but fool me twice, and I’ll sue your butt!”

Do your homework and THOROUGHLY investigate any firm before hiring them to save your biggest asset and the place you call “home.” Scammers are popping up like dandelions on a freshly mowed lawn in April. They advertise on the Internet, freeway billboards, radio, television, and print media everywhere, not to mention spamming your email box with those third-world widows needing someone to receive three million dollars for them. Make no mistake, in many cases, these “loan modification experts” are the exact same loan officers and mortgage brokers who fleeced homeowners the first time around. After losing their jobs with the crash of the mortgage industry, they have found a new way to make ill-gotten profits from hard-working homeowners through loan modifications.

In California, with very few exceptions (and attorneys are one exception… no coincidence there… attorneys make the laws), it is against the law for anyone to take money up front for helping a homeowner who is in default. Don’t trust a company that begins its relationship with you by breaking the law.


Hire an attorney – and not just any attorney either - one with experience in mortgage law, not just one with real estate law experience but one with experience in both FEDERAL and STATE litigation against mortgage companies, one who doesn’t also do family law, criminal law, admiralty law, and immigration law as well, one who limits the practice to mortgage law (or at least a great majority of it), one who has the experienced staff, training, and know how to take on the big lenders and their top notch lawyers (lenders have attorneys – and darn good ones – check out their counsel on the web – big names top schools, shouldn’t you have a lawyer too?).

We are not talking about a refund on your broken television here, we are talking about hundreds of thousands of dollars and your HOME – if you don’t think this is the time to hire a highly educated and experienced professional instead of a weekend schooled, almost out of work, broker slash loan officer slash “expensive water in a wine bottle with alleged magical curative powers” salesperson, I don’t know what would make you take things seriously.

Of course, this is one obnoxious lawyer's totally biased opinion, but one based on many many distressing calls to my office every day. And, yes, my firm loves taking cases against loan modification companies who have violated laws. This field is quickly becoming one of the fastest growing sections for our mortgage law firm.

- Paul J. Molinaro, Esq.

Solid advice, Atty Molinaro.

Two quick questions, though, and my apologies for the bluntness. Of those many, many distressing calls to your office every day, and the cases that your firm does take

1.) How many of those cases involve the larger issues of Mortgage Servicing Fraud or Predatory Lending that may have been the root cause of the borrower' problem?

2.) Of those cases that your firm does accept, how many are taken on contingency vs. being refused because the borrower simply has no money left for a retainer by the time they contact you?


Q: 1.) How many of those cases involve the larger issues of Mortgage Servicing Fraud or Predatory Lending that may have been the root cause of the borrower' problem?

A: We have been litigating against lenders since opening our office in 2006. These lenders include household name lenders and hard money lenders. Our cases are based in the Truth In Lending Act, RESPA, HOEPA, and California state laws. While we also sue the brokers, escrow companies, and the others involved in the loan transaction, these fly-by-night players are often hard to haul into court and if you can get them there, they spent all the ill-gotten booty (meaning a worthless judgment). That said, we often still pursue them right to the end. Most of our cases end with a good deal for the borrower with regard to a balance reduction and affordable monthly payment. These are settlements to which a lender can agree. While this sounds like a loan modification (we've done hundreds of those as well, where no litigation is involved) the terms of a settlement reached during litigation are much better than any loan mod would have reached. These are completely different cases than those against predatory loan modification companies where the suit is based in breach of contract, the Foreclosure Consultant Act, breach of fiduciary duty, fraud, negligence, Business and Professions Code violations, and a host of other causes of action.

Q: 2.) Of those cases that your firm does accept, how many are taken on contingency vs. being refused because the borrower simply has no money left for a retainer by the time they contact you?

We are a FOR PROFIT law firm. We do accept pro bono cases through the county bar associations referral process were they are screened and found to truly qualify for free legal services. That said, we are very sensitive to our clients' finances. By the nature of what we do, almost every one of our clients has a serious financial hardship (they are broke). We work out fee arrangements that are often a hybrid of contingent and monthly payments. This has the most fair deal for us and our clients.

- Paul

What everyone is finally concluding is that mortgage servicers are the nexus of the issues involved in the disaster.

Let us not forget the concept of ultimate power ultimate corrupting those in power. The servicers have had, and in the main, still have ultimate power - information.

There seems to be an almost lemming-like acceptance of everything a servicer says and any financial data their computer system allegedly spits out about a loan.

Given their track record (especially in the sub prime realm) there should not be any confidence in anything they report or construe to be factual in the status of a loan.

Who in a servicer's organization can alter the data in the system? What controls are in place to provide a change history? What error resolution policies and procedures are installed to assure accuracy?

Let me guess - no one asks those critical questions when confronted with the servicer's version of the account history.

Until you've personally seen testimony from one of the servicer's key people fumbling to not appear culpable for really dubious calculations that had been redacted in prior discovery you don't understand the depth the real problem - they can make the data up as they go along because there is no viable audit trail.

Everything the servicer produces is seemingly accepted at face value.

Until they are subjected to more rigorous oversight there is never going to be an honest accounting when their interests are in jeopardy. They have, can and will produce whatever is required to stalemate a victim.

Dido Judge. I have been telling our 13 clients since 96 to keep track of their mortgage payments, giving them detailed instructions on how to do so. I tell them "you would think that they would be better than you at keeping track of your payments", they are not.

Ultimately, once you have been told, it is your responsibility to make sure they credit the payments correctly. (As detailed out in this blog on numerous occasions, that in of itself can be an adventure to say the least), you will have a “history” and more importantly a “document trail” (if you keep the documents). Good luck making heads or tails of that “pay history” report.

Servicers are the silent under regulated “gatekeepers” of the American Dream.

If the success rate for the attorneys to help with modifications on mortgage loans is not good. Why do we hire lawyers to help us and pay them 3000.00 or more for their help. We don't want to go bk we want to save the house and the banks find every type of story not to help us. Who governs them? Why do they have so much power and now they get bailed out and we get pushed out. Isn't their someone who can help us. I am 60 and now I will be thrown out because I had heart problems and I am on disability till the end of the year and my bank won't even let me make partial payments and they were purchased by us bank. Obviously the original bank downey didn't do so hot with their decisions. Shame on all of the banking world. I have little trust in all of them.

Why hire an attorney when you can do a loan modification yourself? You just add more complications. Figure out what you can pay per month and go from there. You tell the bank what interest rate you want. Banks don't want to lose at this point either. The owner and the bank wins if you come to a resolution together. An attorney should be the LAST option.

It is estimated that it could benefit 3 to 4 million homeowners from the new modification procedures. So how do you qualify for the Mortgage Modification? Check the website http://mortgagemodificationprogram.blogspot.com
to see if you qualify. I was in trouble I am glad I did check it before I talk to my mortgage company and it worked - John Mayer, California

I was facing problems with huge loan. After searching the web, I fund out about www.editmyloan.com. This site has got a lot of useful information. They also negotiated with my bank and reduced the interest rate by 2%.

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