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Fix or Evict? Loan Modifications Return More Value Than Foreclosures

March 23, 2011
Mortgage Lending

Banks' Foreclosure Bias Hurts Investors

CRL's report—"Fix or Evict? Loan Modifications Return More Value Than Foreclosures"—shows that banks routinely choose foreclosure over modifying mortgages, even when fixing the loan would be better for loan investors. This bias to foreclose drains investments, including pension funds for retirement, and slows economic recovery.

Download PDF of complete report here.

What do investors think? See our press release, including a quote from Bill Frey, President of Greenwich Financial Services.

When a mortgage becomes delinquent, loan servicers are charged with determining the best outcome for investors. One major consideration is the likelihood that a modified mortgage will end up in default again.

As shown in the graph, actual 12-month re-default rates on modified mortgages fall significantly below expected re-default rates that would make investors favor foreclosure over modification.

"NPV" = A net present value test compares the financial outcome of foreclosure against a loan modification by comparing the expected cash flows to determine which is in the best interest of the investor. The financial outcome is measured by the NPV of the expected cash flows. "Re-default" = A loan modification is considered to re-default once it becomes 60 days or more delinquent.

These findings suggest that many foreclosures went against the best interest of borrowers and investors.

We can't give up on loan modifications.

This report shows re-defaults don't explain the low share of loan modifications. The latest Home Affordable Modification Program (HAMP) figures also show that mods are working under that program: 4 out of 5 households who received HAMP modifications are still current on their mortgages.

Banks must face responsibility and strong consequences for the hundreds of billions of dollars of damage they've inflicted.

  • Banks have evaded accountability. No one should be above the law.
  • Every loan should get a good look from the servicer, and the analysis should be disclosed to investors and homeowners before a foreclosure sale.
  • State Attorneys General are now investigating the loan servicing industry. Their investigation should result in strong consequences and remedies to reform an industry that has perpetuated the foreclosure crisis and cost our country billions in unnecessary costs.