Why Mortgage Loan Modification Is Not Catching On

The government has invested a lot of political capital, in addition to actual capital, to help struggling homeowners stay in their homes through mortgage modification. However the government is finding little success with this program for a variety of reasons. The following post from Blown Mortgage explains some of the reasons for this.

Home loan modifications have been presented as the silver bullet that will kill the evil wolf scaring the living daylights out of investors and homeowners. The government does seem to be willing to place its money (or own money) where their collective mouth is. The White House has invested $75 billion of our hard earned bucks into the Making Homes Affordable with the hope that it will prevent 3 to 4 million Americans from losing their home to a bank foreclosure.

Unfortunately the plan is not exactly burning rubber and is off to a slow start. At the moment only 9% of eligible homeowners are taking advantage of the loan mod plan and have modified their loan terms. The government is not happy with these figures and have begun to pressure and arm-twist banks and lending institutions to get their finger out and start modifying. In a recent report the government named and shamed banks that were not pulling their corporate weight behind the mortgage modification program and are not facilitating the modifications borrowers need.

Why is this the case? Why are banks so slow to act?

There are various reasons, most of which we have already discussed in articles here at blownmortgage.com. These include:

1) Banks are not currently set up for loan modifications. They are set to sell loans and then collect the payments not reduce principals and reduce interest.
2) The large volume of loan mod applications in such a short period of time.
3) Lack of information and understanding about the program and how it works.
4) Mortgage backed securities.

Why mortgage backed securities?

Mortgage backed securities are products like futures and stocks companies can buy or sell. Obviously just like with the purchase of the stocks of a company the purchase of mortgage backed securities provides the owner with a say on how the mortgages are managed.

This is well illustrated by the story of many homeowners that cannot modify their loans because the company that has bought a security backed by their mortgage will not allow them. For instance Wells Fargo may say no to a loan modification you request even though they don’t own your mortgage.

This is caused by ambiguous rules and a rather shady web of interests and ownership. This is rather sad because it means that the group that is more likely to need help, those whose mortgages were sold or used as a security cannot receive the loan modification they need to stabilize their situation.

This article has been republished from Blown Mortgage, a mortgage news and analysis site.