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Do Mortgage Lenders Make More Money When a Loan Goes into Foreclosure
Ilyce Glink
Have you fallen on hard times? Do you need your mortgage loan modified?
Just flip on the television or radio, or surf the Internet, and you will find countless ads placed by companies offering to help you get a loan modification.
The only problem is, it's tough to know if they truly will be able to help you. Why? A new study reveals that servicers actually make more money when a loan goes into foreclosure than if it is modified.
In fact, mortgage servicers -- companies that collect monthly mortgage payments and distribute them to investors -- have found it's cheaper to foreclose on homeowners than to offer loan modifications that would benefit homeowners and investors, according to "Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior," a new report from the
As every good investor knows, net profit isn't just about the rate of return. It's also about how well you hold down the expenses associated with that investment.
Most homeowners assume that foreclosure is a money-losing proposition for lenders and investors. There's a lot of talk that with a short sale, a lender might only lose 10 to 20 percent of an investment. But with foreclosures, lenders might settle for
These numbers would seem to point mortgage lenders and investors toward doing more loan modifications.
But the way the system has been set up, lenders, investors and mortgage servicers may have different priorities, and they are certainly compensated in different ways.
As the recent RealtyTrac foreclosures number showed, the third quarter of 2009 had the highest number of foreclosures on record.
"The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes, and millions more are expected to lose their homes in the next few years," noted
Thompson argues that reduced home values and high unemployment are pushing homeowners to the edge financially.
"With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were at best only marginally affordable when made," she explained.
The report examined foreclosures made from 1995 through 2009 and found that loan servicers make more money by offering forbearance (where the homeowner is given a specific period of time to not make payments in an effort to regroup financially) or payment plans than by cutting principal or offering reduced interest rate payments.
According to the report, "Loan modifications inevitably 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."
Moreover, the report found that financial incentives offered to mortgage servicers by the government to help homeowners avoid foreclosure do not equal the profits servicers make through foreclosure. The lack of "third-party oversight allows servicers to pursue foreclosure instead of effective loan modifications that would benefit homeowners as well as investors." Credit rating agencies and bond insurers do monitor servicers, NCLC found, but they, too, generally push for foreclosure instead of loan modifications.
"The people who could change the way servicers are doing business --
The report suggests the following changes in order to encourage more loan modifications: regulate loan originations; mandate loan modifications before foreclosure; fund quality loan mediation programs; provide for principal reductions on existing loans through the Home Affordable Modification Program (HAMP) program and through bankruptcy reform; increase automated and standardized loan modifications for borrowers in default and provide a safety net for borrowers who do not qualify for a standardized modification; ease accounting rules for loan modifications to facilitate standardization and encourage long-term loan modifications; require loan servicers to be more transparent and uniform in how loan modifications are reported; and limit fees charged to borrowers.
You can download the full report at ConsumerLaw.org.
What a Median-Priced Home Looks Like in 10 Different Cities
Luke Mullins
In the more than three years since the housing bubble popped, American real estate prices have declined at a historic clip. The national median price of an existing home has dropped to $177,700. That's 21 percent below the level in August 2006. To get a sense of how far your real estate dollar will stretch in different parts of the country today, here is a look at homes listed in the $177,700 range in 10 distinct U.S. cities
First-Time Home Buyer Tax Credit Will Be Extended And Expanded
Ilyce Glink
Senate negotiators announced during the last week of October that they had come to an agreement on extending and slightly expanding the extremely popular $8,000 first time home buyer tax credit. The existing $8,000 credit will be extended until June 30, 2010, for contracts that are finalized by April 30
You May Qualify for a Homebuyer Tax Credit
Kathy Kristof
Millions of additional people may be able to take advantage of the new and improved first-time homebuyer tax credit now, and it's not just for first-time homebuyers anymore. You may qualify
Unemployment and Foreclosure: If You Don't Have a Job, How Will You Pay the Mortgage
Ilyce Glink
When it comes to foreclosure, the problem isn't just the 7.2 million jobs that have been lost during this great recession. There are millions of Americans who took a huge pay cut to keep their companies going. Unpaid furloughs and 10 to 25 percent pay cuts mean tens of millions of Americans are having a much harder time paying their bills -- and their mortgages are at risk as well.
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(c) 2009 Ilyce Glink, Real Estate Matters