Correcting an Opinion on Loan Modifications

Filed under: mortgage industry regulation — admin @ 4:57 pm

I read an opinion piece today entitled: OUR OPINION: Regulating resistance in mortgage industry. My problem with this article is it’s misunderstanding of the mortgage industry and of the way regulatory bodies can and should be acting to support a market rebound. The author writes:

“Government regulation in a free market economy can be stifling but if the actions – or, more accurately, inactions – of the nations’ lenders in helping ease the foreclosure crisis is any indication, it’s time to bring the hammer down on those who continue to prey on vulnerable homebuyers.”

And goes on to say:

“Massachusetts approach to loan modification has been three-pronged: a) assess the borrower’s ability to pay, which is a no-brainer first step in any credible loan program; b) compare the value of the income stream to projected foreclosure losses; and c) push lenders for loan modifications that serves the borrower’s needs while meeting the servicer’s economic interest.

Why is that so controversial or difficult? The answer is because predatory lenders make their money on loan origination fees, which generally are not part of a loan modification.”

As I said, my main concern with this article is the nonsense about origination fees being the reason that predatory lenders don’t modify loans… that is just not understanding the industry.   Servicers don’t participate in origination often… they make money on the fees that are charged.    For a while the reason that they couldn’t just modify the loan is because they don’t OWN the loan…they own the servicing rights – or the right to collect payments and fees associated with that … they pay the escrows (taxes and insurance) and handle the 1098s etc… but they don’t make money on origination – that is a primary market transaction…while servicing is squarely in the secondary.  Laws have freed up the statutory ability of the servicer to perform these actions…but they again…DON’T OWN the loan… they have to get permission from the owners to just cede 20-30% of the value of the asset to the distressed borrower for tax purposes and out of the goodness of their heart.

Essentially, if you lend your brother in law $100,000 dollars…which he is supposed to pay $1000 per month on.    He used his IRA as collateral.  The IRA, which when you lent the money was worth $150,000 is now worth $75,000.    The brother in law stops paying the loan.  Now brother in law comes to you and says… ok… I can’t make the payment – so can you just reduce what I owe you to the value of my collateral or $75K… basically just give me 25K.  And I would like for you to reduce my interest rate and re-amortize the payment to the new principal balance.  The reason I would do this would be because if I foreclose on the collateral …and require my BIL to liquidate his IRA… I know that I am not going to get the full $75K after penalties and fees.  But I also have no idea if my BIL will even pay the loan at the lesser rate… and now I have a smaller equity position.  Now what if the money wasn’t yours that you lent the BIL… what if it was from a family inheritance… you would need to get permission from them to just reduce the principal amount owed.

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