Impediments To Voluntary Loan Modifications

Contained in a recent report(1) issued by the Center For Responsible Lending (CRL) is a list of existing barriers that impede the effectiveness of voluntary mortgage loan modifications between loan servicers and financially strapped homeowners seeking relief from unaffordable house payments:

1. Mortgage securitization: When servicing securitized loans, servicers are bound by the terms of contracts that may impose legal limitations on modifying loans that are included in investment pools;
2. Fear of lawsuits: Another legal impediment is fear of investor lawsuits, since most loan modifications will have disparate financial impacts on different classes of investors in any given security;
3. Financial incentives to foreclose: The way that servicers are compensated by lenders often creates a bias for foreclosing on a mortgage rather than trying to prevent foreclosure. Servicer costs are reimbursed following a foreclosure, but generally not reimbursed for a modification in privately securitized mortgages;
4. Second mortgages: Between one-third and one-half of the homes purchased in 2006 with subprime mortgages were made with two mortgages, and many more homeowners have open home equity lines of credit secured by their home;
5. Obstacles to assistance by servicers: Despite repeated attempts and many hours of effort, many homeowners report they repeatedly get put on hold when they call servicers or bounced from one person to another without receiving any meaningful assistance.

For a more detailed discussion of these obstacles to modifying mortgages, see testimony before the Senate Banking Committee presented by Eric Stein, Senior Vice President of the Center for Responsible Lending.

For the CRL (January 2009) report itself, see Continued Decay and Shaky Repairs (The State of Subprime Loans Today).

(1) The report provides an update on the subprime mortgages that triggered the current foreclosure crisis, focusing on the performance of these loans and efforts to stop the ongoing surge of foreclosures.