By Mark Huffman
ConsumerAffairs.Com
April 15, 2010
U.S. home foreclosures are going up, not down. The latest quarterly report by RealtyTrac, a real estate data company, shows foreclosure actions rose seven percent in the first three months of 2010 from the previous quarter.
The question is why. Is the economy still that bad? Is the government's home modification program that inept? Is the housing market still a disaster area?
A review of the ConsumerAffairs.com complaint database for the first quarter of 2010 reveals 297 complaints containing the keyword "foreclosure." They are remarkably consistent in their descriptions of the authors' dealings with their loan servicers.
Homeowners describe what sound like stalling tactics when they detail their efforts to receive a loan modification -- documents are requested and supplied, only to be requested again. Sometimes requested over and over again. Eventually time runs out and foreclosure begins.
The Obama Administration's home modification program, begun a year ago, has achieved little in the way of results, earning it a rebuke this week from a Congressional Oversight Panel. The reason for its lack of success, and a rising number of U.S. foreclosures, might be explained in a little noted report issued last year by the National Consumer Law Center.
The report, Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior, suggests the problem is systemic: it is in the financial interests of the servicer to foreclose, not modify.
The important thing to understand in this process is that the servicer -- the bank or financial institution that collects your mortgage payment -- almost never owns the loan. They are simply hired to manage it for the owners, usually a pool of investors. According to the NCLC report, servicers have four ways to make money:
• The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
• Fees charged borrowers in default, including late fees and "process management fees";
• Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
• Income from investment interests in the pool of mortgage loans that the servicer is servicing.
Little incentive to modify
"Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure," the report asserts.
Make no mistake, a performing loan is better for everyone -- servicers included -- than one that goes into foreclosure. But if the loan is not performing, a servicer who is collecting fees based on the full amount of the loan thinks it is better off if the loan goes into a foreclosure than if its modified at a lesser amount. The NCLC report suggests they are correct to assume that.
The monthly fee that the servicer receives based on a percentage of the outstanding principal of the loans in the pool provides some incentive to servicers to keep loans in the pool rather than foreclosing on them, but also provides a significant disincentive to offer principal reductions or other loan modifications that are sustainable on the long term.
"In fact, this fee gives servicers an incentive to increase the loan principal by adding delinquent amounts and junk fees," the report says. "Then the servicer receives a higher monthly fee for a while, until the loan finally fails. Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible."
Waive fees?
In fact, if the distressed mortgage goes to modification, the servicer may be asked to waive some or all of those fees in order for the homeowner to secure the modification and stay in their home.
However, the report notes, the servicer is almost always assured of collecting their full fees if a foreclosure goes through.
"Servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid," the report states. "The rules for recovery of expenses in a modification are much less clear and somewhat less generous."
If the system is designed to encourage foreclosures, it's apparently working. Jack and Sandy of Charlevoix, Mich., said they were turned down for a modification last year but were able to secure a "short sale" in early January. The claimed the bank stalled for nearly three months.
Then on March 16, they said, the sheriff tacked a foreclosure notice to their door, their first indication foreclosure had even started. They were stunned to learn that the bank had initiated foreclosure action January 4.
