Foreclosures Are More Profitable Than Loan Modifications, According To New Report

[AllentownJake]

Mortgage companies are more likely to foreclose on homeowners than modify their loans because they make more money off foreclosures, argues a new report by a consumer advocacy group.

While homeowners, lenders and investors typically lose money on a foreclosure, mortgage servicers do not, says report author Diane E. Thompson, of counsel at the National Consumer Law Center. Servicers are the companies that manage the mortgages and collect payments.

"Servicers may even make money on a foreclosure," she writes. "And, usually, a loan modification will 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."

Thompson attributes this to a system of perverse incentives created by lawmakers and rulemakers in the market, like credit rating agencies and bond issuers. The private rulemakers typically dictate how a servicer can account for potential losses and profits. They hold enormous sway over securitized mortgages, which are owned by investors. More than two-thirds of mortgages issued since 2005 have been securitized, notes the report, using data from the industry publication Inside Mortgage Finance.


Read more at: http://www.huffingtonpost.com/2009/10/21/perverse-incentives-lead_n_328378.html

[Phoebe Loosinhouse]

1. Yes, but more and more courts are apparently taking the position that

the servicers do not have standing in a foreclosure action.

[Lance_Boyle]

2. This is why mortgage contracts specify foreclosure as the remedy for borrowers breaking contract

instead of renegotiation. The *ONLY* voices saying renegotiation (and cramdown, even!) would be better for lenders were those seeking something-for-nothing after breaking their own mortgage contracts.

[Sinti]

3. Foreclosure is having cake and eating it too, if the loan was past the early stage

They keep your money, and they keep the land. Win-win. Say what you want, the banks lose nothing by foreclosing, unless land values go down and they're stuck holding a note for more than the parcel is worth. It Greatly Benefits them to foreclose if land values go up.

[Festivito]

4. This is an insult to the American people. /nt