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Mortgage Modification Madness (Part 1)

Oct 3, 2009 - By the end of the second quarter of 2009, over 13% of all residential mortgage borrowers were either delinquent by 30+ days in their loan payments or were actually in the foreclosure process. In the sub-prime mortgage category, 26.52% of borrowers were delinquent in their payments contrasted with 5.44% of prime mortgage borrowers having fallen behind. Government estimates project that approximately 10 million homeowners are at risk of defaulting on their payments. From that total, the government believes almost 40% of those at risk could be helped and a potential problem avoided. A number of programs have been launched in the past several years targeted at helping distressed homeowners with very limited success to show for the effort. The Hope Now Alliance was launched in the fall of 2007 and the program successfully modified just several hundred thousand mortgages with almost half of the participants in turn having re-defaulted on their loan payments. The Hope for Homeowners program was then initiated in the summer of 2008 and after failing to make significant headway in assisting the approximately 400,000 homeowners the program was targeted to reach, the government announced plans to revamp the program. Next, in March of 2009, the Obama Administration proposed its Making Home Affordable program which was hoped to assist 7-9 million homeowners.

The lack of success realized by each of these programs can be attributed in large part to the fact that participation by the key players: the lender, mortgage servicer and the investor, has been completely voluntary. The securitization process, which converts loans into pools of mortgage bonds and then sells them off to investors, was a major system flaw contributing to the mortgage crisis and now in turn appears to be the obstacle preventing a solution. Getting all of the players involved in the process to sign off on any changes to the original terms of the mortgage is both a logistical and legal nightmare and one of the key reasons why so many homeowners remain stuck with their toxic mortgage. Homeowners are justifiably confused about the mortgage process and who controls their loan, with many borrowers believing that a polite phone call to their lender, along with a valid hardship explanation, is all that should be required for the lender to change their loan terms and save their home. The distressed homeowner sees modification as a win-win solution for both themselves and their lender and cannot understand why the lender is so slow to act. What unknowing borrowers do not realize is that this should be a simple process with their lender, notwithstanding the securitization process which brought a number of interested parties and decision-makers into their home.

The maze of players in the loan process has become so complex, compounded further by the number of bank failures and resulting mergers and acquisitions, that only a judge is truly capable of fairly sorting out the mess and assigning responsibility to determine a fair resolution for all interested parties. Judges are permitted to modify the terms of consumer debt in the course of bankruptcy proceedings, however several attempts to grant judges this same authority with regard to mortgage debt, commonly referred to as the “cram-down provision”, have ended up going nowhere in the legislature. As long as the modification process remains a voluntary one, it will also remain a protracted, painful and ultimately a very costly one while distressed properties continue to flood the market spreading the pain to all homeowners.

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Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.