Mortgage Modification: An Explanation Of Why Lenders Prefer Foreclosure Of Delinquent Mortgages

A good percentage of my clients over the past three years have been trying to save homes from foreclosure by modifying their mortgages. Successful modifications are becoming more common, but still, the vast majority of people who call me state that their mortgage lender is not willing to modify their loan in a way that would permit the borrowers to maintain the mortgage until the housing market recovers. Clients wonder, and they asked me, why their mortgage company would rather force them into foreclosure than modify the mortgage so that the loan can be paid. Why, clients asked, would the bank want their vacant property rather than whatever amounts of money the clients can afford to pay.

I just read an interesting article by Mr. Richard Kessler, CEO of a web based company called www.cancelthemortgage-now.com, about the mortgage lending industry's loan modification policies. Mr. Kessler suggests several reasons why mortgage service companies have difficulty entering into flexible mortgage modifications and why they have rational reasons to foreclose delinquent mortgages. His article tries to explain the difficulty you may experience trying to modify your own home mortgage. Rather than try to paraphrase the article, I offer selected portions for your own reading:

Mr. Kessler states as follows:

"The cost of a foreclosure, it turns out, is pretty staggering and one wonders why lenders and the investors they represent aren't jumping at a solution, any solution, that would allow them to avoid going to foreclosure whenever possible... The fact is the banks prefer to take large losses in foreclosure rather than offer various types of smaller discounts to enable the debtor to convert a loan in default into a performing loan. Part of the problem is the moral cost dilemma. If defaulting loans are getting a better deal than those loans which continue to perform, it is but a question of time until more and more loans go into default. If bad behavior is rewarded instead of punished, more and more people will behave badly...."

"What everyone overlooks is the institutionalized constraints to mortgage modification which have resulted from the securitization of mortgages. More than 80% of all mortgages have been converted into securities. This practice has divided those who control the mortgage from those who suffer from the incidence of loss. The certificate holders bear the losses. The trusts and servicing companies control the mortgage. ..For the banks which control but do not own the mortgages in default, foreclosure is far, far more profitable. It is highly profitable to collect the fees associated with foreclosure rather than to forego the profits in favor of an alternate dispute resolution. This is a major constraint to mortgage modification of securitized mortgages."

"In addition, there are many constraints to mortgage imposed upon securitized mortgages. These restrictions either prohibit or restrict the changes which can be made to mortgages in default. Some of these restrictions are contained in the master pooling and servicing agreement which form the investment vehicle."

posted by Jonathan Alper, asset protection and bankrupty lawyer, Orlando, Florida