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Mortgage Modification Mystery

posted by Jean Braucher

Media reports have recently focused on big banks spontaneously offering mortgage modifications, even including principal reduction, to borrowers who are not in default and who haven’t even asked for them. See here.  The banks mentioned, JPMorgan Chase and Bank of America, both took over a lot of nasty mortgages from failed financial institutions (Washington Mutual and Countrywide Financial).

The modifications seem to be going in particular to current but underwater customers with pay option ARM mortgages (which allowed debtors not to pay for a while and add skipped payments to the principal).  Industry analysts have explained the banks’ actions as getting ahead of a problem that could affect their stock prices.  See here.  Apparently banks have been quietly modifying current mortgages for years, and hundreds of thousands of people, maybe more, have gotten improved deals this way.

But there is still a mystery.  Why don’t the banks wait for a missed payment or at least a request before making an offer?

  The homeowner featured by the NY Times, Rula Giosmas of Miami, who got her mortgage principal cut in half without even asking, was quoted as saying, “I would not have defaulted.  But they don’t know that.”   It is obvious that some money is being left on the table. 

Is there a grander plan?  The mystery takes me back to my college Behavioral Psych course.  We fed Rice Krispies to lab rats who had to push a lever to try to get a treat.  The rats frantically pushed the lever when the rewards were random but not if they were predictable.  Are the banks trying to get underwater borrowers to keep paying by offering random rewards to those who are current?  If so, why aren’t they advertising the practice rather than keeping it hushed up, creating a lottery-like frenzy to stay current?  Perhaps the recent media attention was staged?

Calling all gumshoes.  What is your explanation, and how big is this phenomenon?


There's a theory that servicers are doing this selectively for loans with documentation or other problems. This makes more sense to me in a refi scenario than a mod scenario. But maybe some of these reported mods are really refis? Executing new agreements with borrowers would make the original flawed agreements go away, no?

The pay option ARM allows for negative equity to accrue. Some contracts had upper limits (I have had two in the last 15 years), but the upper limits were always pretty high (that is, you start with an 80% LTV, the option would even allow for more than 100% LTV based on the original appraisal).

So, maybe they are trying to get in front of a runaway train of rising principal balances?

But...this cannot solve paperwork issues unless the borrower agrees to sign something new. The way I read the artcile, there is no such request. People are simply being notified that their principal was reduced. Or maybe that's a detail missed.

In the end, if the bank could clear paperwork issues and also end the pay-option feature with the homeowner's agreement (give to get on the modification), it seems to make sense.

Wish they would just do this everywhere, and end the instanity.

It gets awfully confusing when servicers are referred to as banks or implied owners of the debt. Following this mess over the last few years it has been speculated that a large part of the reason for failures in HAMP and other similar modification programs is that the servicers have little to gain in modifying mortgages and that the PSA's prevent the REAL owners from participating directly in any negotiations with borrowers. Then there is this weird story about unsolicited mods with huge principal reductions. SoundS fishy and like twisted false hope with no real statistics supporting the story but one hal in Florida. With all the other bizarre behaviors by servicers, this could just be another silly mistake.

I have many questions like, who was the servicer, was the loan securitized, was this a Fannie or Freddie loan? And so on.

This like so much else makes very little sense.

I also believe it may relate to issues with debt collection or paperwork and faulty hamp modification hell by a servicer who probably is not elegible per the PSA of the Security.

The deposit of the security, and or the total public dispersal of the funds without notification of the debtors . in my case - may be more like it. I am being harassed into responding to an inhouse offer while I am under NPV Denial - and preparing my response within the required 30 days.

The inputs - geemeenie - that took 160 days late to arive are ALL wrong anyways.

?> Its like falling down a hole. I wont modify. Based on the dispersal issue I believe I am ... one of a few who know what they know what i know

what they have done sucks !!

A modified mortgage is, essentially, a "new deal". With the old deal laundered off the books, everything is shiny and clean once again.

And, as with forbearance agreements, due process may very well go out the window as borrowers sign away their legal rights to both past and future improprieties of the servicer, the note holder, the servicer's CEO's gardener, Speed Racer and Bastet.

A lot of times this is so the servicer/loan owner can sell the loan to an investor and offload the risk. If the owner can't sell to an investor because the loan does not meet guidelines, the lender just makes the loan fit the guidelines and then sells it.

Is it possible that the securitized trusts, servicers, securitizes/originators and likely the government are quietly acknowledging the issue of standing on all these millions of mortgages. Is this a slippery attempt to stop the bleeding before this monster gets out of control.

This line of thinking goes against many early thoughts that the varying incentives of servicers vs. Investors has been the obstacle of requested modifications.

It leaves the question: what to do with the millions already caught in the modification scheme. Do new deposits if these issues in so called Bad Banks deal with these millions? Was HAMP and HOPE and others an early attempt at the same with less compliance from all the same and usual suspects from above?

I continually wonder who and how many knew standing could be a real issue all along. Risking that dodo borrowers would never figure it out.

I certainly don't like being entangled is this mess. But can't wait to see how this is all going to shake out. What an interesting situation.


Mr. Dillon has pointed out the answer.

Consider who has access to the repository of evidence of wrongdoing; then extrapolate from that what needs to be done to minimize widespread legal exposure.

Consider then the pyramid approach to mitigating the losses from litigation - get rid of the biggest potential risks first and work your way down the pile.

Like most forbearance agreements, these alleged modification offers will include indemnification for any wrongdoing and may even attempt to preclude future litigation for any acts on the part of the servicer.

The value of that indemnification is easy to calculate for sophisticated and experienced servicers who have known and fairly-well fixed litigation expenses; this is, after all, a quantity-based transaction process until someone being abused by it finds the resources or counsel willing to fight.

The fact is, there are predators who are still allowed to participate in mortgage servicing. Their executives are largely immune from actual culpability for their predatory behavior.

Until that changes, everything else is window dressing.

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