Since so many people have asked, here is why, in my opinion, the system is struggling with mortgage modifications and an explanation of how we got here inthe first place.
- What is so hard? Lenders, looking for new sources of profit, bundled mortgages and other loans, into trusts. Then, investment houses sold investors bonds backed by these trusts. Your monthly payment is used to pay the bondholders their money. Investment houses, trying to minimize risk, made it so that any one loan would be owned by thousands of investors.
- Who is making decisions? It is not the original lender. The payment you send in is collected by a mortgage servicer. The money is paid to the investors. The servicers are getting swamped with calls to review the loans individually – something they were not created to do. Some servicers have authority to modify a bad mortgage. Other servicers do not, at least not without getting approval of the investors or a “master servicer.”
- Tranche warfare, huh? Some of these securities have been divided into different classes, or tranches. Each tranche has different rules where some holders of certain tranches may actually benefit from a foreclosure. Other holders may not – thus creating tranch warfare.
- Underwater homes? What do you do with a home that is underwater, and not in the Atlantis style? A home is underwater when the loan is more than the value of the home. Some homes were underwater when they were bought. What do you do when the home is underwater? Some investors do not want to have the principal reduced – even though that is necessary to save the home. If the principal is going to be reduced, who should take the hit? That is a key question in getting modifications.
- What rules apply? Since these securities were loosely regulated to begin with, and since regulators did not really understand what they were regulating, there are few, if any, rules to govern modifications. Some bonds have mortgages from separate lenders or different classes. This creates a new bond which is now two generations away from the original loan. So, there are no agreed upon rules for modifying these mortgages. The servicers are trying to figure out how to get modifications done, especially since they were created with just moving money from borrower to investor.
- How does the law play into this? Sometimes, to make a loan affordable, an investor must take a lower return on investment (ROI). This is done because the interest rate is dropped, the principle is dropped or both. With few rules in place, servicers are concerned that they will be sued if they agree to a modification with a borrower who could afford the original modification. Of course, some states like California require the lender to try to work out a modification before they foreclose. This may put sevicers in the middle.
- What do servicers look at when trying to determine if they should modify a mortgage? Sure, servicers look at your ability to repay the mortgage. But, they also look at whether you are likely to default. This is based on a complex formula that probably does not work in the worst housing market since the Great Depression.
- Are some loans unmodifiable? Yes. Some people have loans on homes they can never afford. Some people have loans were the mortgage amount is so out of whack that no modification will ever fix it.
This is a bit of a simplistic approach to how we got here and why some modifications appear impossible. It also explains why some modifications take so long.
Of course, if you have any questions, please email me at firstname.lastname@example.org and ask. Also, get my report on how to avoid foreclsoure by emailing email@example.com.