A Loan Officer's Look at Mortgage Modifications
Editor's note: The following was written by a loan officer in January 2011. He asked Bills.com not reveal his name or employer.
I became involved in mortgage modifications at the start of the recession and the end of the housing boom, and have assisted many borrowers in getting real modifications that allowed them to save their homes in many cases, or in being able to negotiate a forbearance that gave them some relief from payments, albeit temporarily. Lately, however, it appears mortgage servicers stopped providing modifications, no matter the hardship or income reliability. The spigot for modifications was turned off for everyone in late 2010.
When the mortgage meltdown began in the summer of 2007, lenders scrambled to help borrowers who sought modifications. In some cases, lenders such as Wachovia offered homeowners much needed relief with whopping principal reductions as well as interest rate reductions. In those heady times, lenders were encouraged and incentivized by the government to grant substantial modifications, in many cases giving lenders up to $1,000 per modification they granted.
Starting in 2009, the numbers of applicants increased exponentially. Mortgage servicers were overwhelmed with requests. Since many of the lenders did not have modification departments, these requests were sent to the work-out departments. The workers there were used to doing one type of deal, which was working out payment plans for borrowers in danger of losing their homes to foreclosure. They were not prepared for the massive influx of applications that came in not only from homeowners who were in arrears on their payments, but also from a host of other modification experts and attorneys who claimed to represent beleaguered borrowers.
Major lenders responded by creating small departments to handle these requests. These departments were called “Home Retention” or “Mortgage Assistance” departments (they intentionally avoided using the term “modification”). Many function only by the rules formed by government-sponsored programs such as President Obama's Home Affordable Modification Program (HAMP) program. As time passed, fewer modifications were approved and homeowners were frustrated with months passing with little or no communication from servicers.
Some homeowners were encouraged by unscrupulous or misguided modification “experts” to stop paying their mortgages, claiming servicers give a higher priority to the applications of delinquent homeowners. Unfortunately, some servicers encouraged this behavior by categorically declining modification requests of non-delinquent borrowers. Their reasoning was that if the borrower continued to make timely payments then they did not suffer from a financial hardship and therefore did not merit a modification. The truth was many people valued their high credit ratings and would do anything, including burn through retirement savings, to make their monthly mortgage payments.
Mortgage servicers still cannot keep up with modification applications. For example, the Treasury Dept. reported that JPMorgan Chase has modified just 67,722 of 203,594 eligible mortgages. Approximately 549,620 permanent mortgage modifications were started since 2007, but that is a fraction of the 3 or 4 million required. HAMP is considered a failure, but Congress is reluctant to stop funding it because they do not have a better idea to encourage modifications.
I have spoken to hundreds of homeowners who have applied for a modification. Almost unanimously, they tell me they were either declined or given a modification that did nothing to relieve their burden. A common modification in 2010 was adding fees to the existing mortgage balance, extending the term to 40 years, slapping a variable interest rate on the package and calling it a day. In some cases the new loan lowered monthly payments, but for most people staggering fees more than wiped out any monthly savings.
Mortgage servicers and investors have little or no incentive to modify loans. Instead, it is more profitable to tag distressed homeowners with late fees and foreclosure fees, and then foreclose. Cruelly, mortgage servicers’ Web sites continue to dangle the possibility of a modification to strapped borrowers, stating words to the effect of, “Call us, we want to find a solution for you.” In the experience of homeowners I speak to, these are just calculated, feel-good phrases written by public relations departments that are not borne out by servicers’ actions.
Taxpayers bailed out the banks without conditions. What the government should have done is imposed conditions on the banks, which forced them to grant modifications and principal reductions to distressed mortgage customers. Instead regulators handed out blank checks and, of course, mortgage servicers gave executives bonuses. The bailouts helped Wall Street and not Main Street.
Until the government mandates that banks grant modifications, we will continue to see this arrogant and self-serving attitude from banks. Write to your elected representatives and demand that lenders start bailing out average American homeowners across the country. After all, we bailed them out when they needed it. It is time banks did the same for distressed homeowners.