A new study from the Center for Responsible Lending, “Fix or Evict? Loan Modifications Return More Value than Foreclosure,” found that families facing eviction outnumber those who received a loan modification by 12 to 1.
And argues that banks and loan servicers often foreclose on homeowners, despite the fact that investors (and clearly homeowners) have more to gain from a loan modification.
This goes against recent popular belief, which points the blame for a lack of loan modifications on the fact that many of these mortgages are in securitized bundles, making them difficult to modify.
The CRL found that even with a hypothetical re-default rate as high as 79 percent, which is significantly higher than actual rates, reducing a homeowner’s monthly mortgage payment by 20 percent is better for investors than foreclosure.
“It’s well documented how mortgage servicers’ unfair, shoddy practices have hurt homeowners,” said Mike Calhoun, president of the CRL, in a release.
“This research shows that servicers also routinely give the investment community a raw deal.”
And banks’ interests are often misaligned with the best interests of investors, according to Bill Frey, President of Greenwich Financial Services, and longtime investor advocate.
“It pays for banks to keep mortgages in a state of suspended animation, because they can collect late fees while also protecting second mortgages that are in the bank’s portfolio,” he said in the release.
Finally, the report contends that the poor track record of loan modifications can’t be blamed on homeowners who re-default, but rather on the use of proprietary programs that fail to adequately help homeowners.
“Servicers have been allowed to follow their own voluntary loan modification program, and the result has gone against the best interests of everyone but the servicers themselves,” said Calhoun.
“We need mandatory reforms that ensure servicers follow the law and act in the best interests of their clients—that would end up benefiting everyone.”
Unfortunately, most of these foreclosure prevention programs are coming to an end, with HAMP already under fire from House republicans, and expected to prevent just 700,000 foreclosures when all is said and done.
The initial HAMP re-default rate was seen at about 20 percent, well below the re-default rate for proprietary loan mods.