New research by the Center for Responsible Lending finds that banks and other loan servicers often foreclose when investors have more to gain from a loan modification. The study—"Fix or Evict? Loan Modifications Return More Value than Foreclosures"—also finds that the industry's poor track record on loan modifications can't be blamed on homeowners who re-default.
The research involved running more than 1,500 simulations of the test used by loan servicers to determine whether to modify distressed mortgages or foreclose. CRL found that even with hypothetical re-default rates as high as 79%—much higher than actual rates—reducing a homeowner's monthly payment by up to 20% is better for investors than foreclosure. The analysis shows that the objective cost-benefit analysis favors a much higher proportion of payment-reducing mortgage modifications than we now see. Families facing eviction now outnumber those with a modification 12 to 1.
"It's well documented how mortgage servicers' unfair, shoddy practices have hurt homeowners," said Mike Calhoun, president of CRL. "This research shows that servicers also routinely give the investment community a raw deal."
The results of the research have wider implications for ordinary Americans, since many of these mortgages are part of securities held by small banks, life insurance companies and pension companies. By regularly ignoring investors' best interests when deciding whether to foreclose or modify a distressed loan, banks and other mortgage servicers are draining retirement savings and other investments that businesses and households rely on.
Bill Frey, President of Greenwich Financial Services and a longtime investor advocate, said, "Mortgages in securities often won't get fixed voluntarily, even when a modification would prevent foreclosure, because banks' interests are misaligned with the best interests of the investors. It pays for banks to keep mortgages in a state of suspended animation, because they can collect late fees while also protecting second mortgages that are in the bank's portfolio. The misalignment of economic interests between the owners of mortgages and those who service them is the single reason why the mortgage problem has become a crisis and a massive economic drain on this country."
"Fix or Evict?" shows that loan modifications that reduce mortgage payments are more often than not good for investors. This also is corroborated by recent data from the Home Affordable Modification Program (HAMP), which shows that four out of five households who received HAMP modifications are still current on their mortgages. This record is better than the general performance of modified loans, since mortgage modifications made under HAMP more often reduce borrowers' payments and generally perform better than those made outside HAMP.
"Servicers have been allowed to follow their own voluntary loan modification program, and the result has gone against the best interests of everyone but the servicers themselves," said Calhoun. "We need mandatory reforms that ensure servicers follow the law and act in the best interests of their clients—that would end up benefiting everyone."
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