The paper addresses the question “why servicers foreclose when they should modify?”
The servicers have different ways to respond to loan mortgages modifications. As the servicers have different level of interests and incentives as compared to the investors or homeowners, the way that they get benefit and loss on their money is also different from those of investors. Therefore, they usually either don’t care about if the investor is getting a loss through foreclosure or they prefer foreclosure over modification of loans because this is for the servicers’ own benefit. The big question and problem is that why don’t servicers modify loans, and rather prefer foreclosures?
Well, “servicers, unlike investors or homeowners, do not generally lose money on a foreclosure.”
In fact, they make money through foreclosure and loan modification costs them some amount of money. Servicers remain largely unaccountable for their poor performance in making loan modiﬁcations.
“Servicers have four main sources of income;
The monthly servicing fee, a ﬁxed percentage of the unpaid principal balance of the loans in the pool;
Fees charged borrowers in default, including late fees and “process management fees”;
Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
Money supply refers to the amount of money that is circulating in the economy and which is available for spending. It is an important indicator of the economic status of a given country. The Federal Reserve is charged with the responsibility of regulating the money supply and it does this by increasing it if there is a shortage or by decreasing it if it is too much. There are several ways that the ...
Income from investment interests in the pool of mortgage loans that the servicer is servicing.”
According to the economists, the number of foreclosures can be decreased by increasing the number of delinquent loan modifications.
Congress, the President, the Federal Reserve Board, bankers, all agree to this solution of the issue. But the governmental loan modifications is not keeping the pace with foreclosures.
As the servicers benefit from foreclosures and for them loan modification is not a good personal option, they usually, if in any case, offer temporary modifications not permanent. They are definitely
aware of the fact that loan modifications profit the investors some how, but they just don’t find it as a better option for their own selves.
All that matters to a servicer in a foreclosure or loan modification is their own financial benefit.
What servicers need is “powerful motivations to perform significant numbers of loan modifications.” The paper makes several recommendations on how this is possible, by:
Avoiding irresponsible lending
Mandating loan modification before a foreclosure
Funding quality mediation programs.
Providing for principle reductions in making home affordable and via bankruptcy reform.
Continuing to increase automated and standardized modifications, with individualized review for borrowers for whom the automated and standardized modification is inappropriate.
Easing accounting rules for modifications.
Encouraging FASB(Financial Accounting Services Board) and the credit rating agencies to provide more guidance regarding the treatment of modifications.
Regulating default fees.