The key to keeping a financially strapped borrower in a home is to modify the mortgage to cut the monthly payment, whether by cutting the interest rate or loan balance or by stretching out the repayment term. What makes this difficult is that often the loan servicer — the bank or office that bills the homeowner and tracks his or her payment history — doesn't own the loan, which has been packaged and sold to investors. The servicer's right to sign off on a mortgage modification may be murky, even if in the long run it will benefit the investor by keeping the home out of foreclosure.
In fact, servicers have powerful incentives to do the wrong thing — wrong for borrowers, wrong for investors, wrong for the economy. They make more money, and have better guarantees of payment, if they delay modifications, even if they force homeowners into foreclosure.
That's because they can continue to collect junk fees from homeowners while they stretch out the process. Although they have to advance interest payments (and sometimes principal) to investors even on delinquent or defaulting loans, they're first in line to be repaid from the proceeds of the sale of a foreclosed home. Under those circumstances, why would a servicer break a sweat to keep a home out of foreclosure?
Emphasis mine. I've been wondering why more loan modifications, which make a lot of sense, aren't going through. Thanks for nothing, servicers.
