Mortgage Loan Modifications Prove Challenging for Homeowners

Mortgage loan modifications haven't yet gained enough traction to slow down the foreclosure crisis-and one consumer group explains why.

Cheerleaders must complete flawless back handsprings, and skateboarders have to maneuver through Kickflips and Frontside Airs. These are challenging feats, to be sure, but some people find them a breeze compared to completing a mortgage loan modification.

Servicers and loan modifications

The mortgage servicer is the entity that handles the administrative details of a funded mortgage loan: collecting payments, enforcing defaults, and pursuing foreclosures. These tasks are provided on behalf of the lender and the investor group that owns the mortgage.  

When homeowners want to request a modified refinance, they must call the servicer. Unfortunately, many of them aren't fielding those requests with much enthusiasm. Even as the public demands that the mortgage loan industry make a concerted effort to alleviate the foreclosure problem, these mortgage servicers aren't cooperating.

Experts say that the problem lies in the complexity of mortgage loan funding, and the way mortgage servicers are paid. A mortgage loan commonly has several stakeholders: lender, servicer, and a group of investors. Usually, the servicer can't push through a modified refinance without first obtaining permission from every stakeholder on that loan. Not only is this a cumbersome process for the servicer, but it's also a course of action that offers no financial incentives to complete. Often the opposite is true: the servicer can actually increase its income by delaying the modified mortgage request and allowing the borrower to default.

Modified mortgage practices need overhaul

The National Association of Consumer Bankruptcy (NACBA) recently spoke out against the industry's modified refinance efforts. The organization argued that, in addition to the problem with servicers, most loan modifications don't do much to lessen the burden on homeowners. A federal government statistic-that half of all modified refinances default again-appears to support NACBA's claims.

NACBA takes issue with the industry's unwillingness to offer principal reductions, among other things. The organization says that less than 10 percent of loan modifications incorporate principal write-downs. On the other hand, most modifications add unpaid fees and interest to the loan balance. And nearly half of modified mortgages, some 45 percent, include increased payments. NACBA believes that these practices prevent loan modifications from being as effective as they need to be.

Homeowners must not only work with a potentially unwilling servicer, but also accept relatively rigid modification terms. These factors may partially explain the decline in the number of delinquent homeowners who are pursuing a foreclosure prevention strategy. According to the State Foreclosure Prevention Working Group, only 20 percent of seriously delinquent homeowners were on track for "loss mitigation" in September.

Unfortunately, distressed homeowners can do backflips and Ollies all day long, but it isn't going to help them capture their loan servicer's attention, or negotiate better terms on the modified refinance. NACBA agrees; the organization says that it will take nothing short of legal intervention to make the loan modification process homeowner-friendly.