A new study from the National Consumer Law Center reveals that mortgage servicing companies (firms that oversee loans but don't officially "own" them since they've been securitized and resold to other investors) may find it in their financial interest to let homes go into foreclosure instead of working out a loan modification or short sale.
From a Huffington Post article:
While homeowners, lenders and investors typically lose money on a foreclosure, mortgage servicers do not, says report author Diane E. Thompson, of counsel at the National Consumer Law Center. Servicers are the companies that manage the mortgages and collect payments.
"Servicers may even make money on a foreclosure," she writes. "And, usually, a loan modification will cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed."
[snip]
More than two-thirds of mortgages issued since 2005 have been securitized, notes the report, using data from the industry publication Inside Mortgage Finance.
In those cases, the servicer is empowered to handle virtually all aspects of the mortgage, from collecting the monthly payments to initiating foreclosure proceedings. While they're obligated to do what's best for the ultimate owners of the mortgage -- the investors -- servicers have some latitude in deciding what course of action to pursue, be it a foreclosure or loan modification.
When a homeowner is delinquent on a mortgage that's been securitized, the servicer must front the late payment to the investors. When a home is foreclosed, the servicer is typically first in line to recoup losses. But if a mortgage is modified, the servicer typically loses money that isn't necessarily recoverable.
This has huge implications for the future of the regional and national housing markets. Realtors, consumers and the general public have been consistently dumbfounded about why more lenders don't pursue loan modifications or short sales since it would seem, intuitively, that they stand to gain more from those options. The NCLC report illustrates an important fact: a big chunk of these homes are serviced by companies who stand to gain more from foreclosure.
All of this indicates that—unless policy or other market forces intervene to realign these incentives—loan modifications and successful short sales will continue to be less common than we'd like.
NCLC Report on Mortgage Servicers -
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