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The Problems with Mortgage Modifications

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By George W. Mantor

RISMEDIA, November 18, 2009—If you have applied for a mortgage modification, I wish you luck. It seems so simple on the surface, but as many a frustrated homeowner has learned, the Cavalry isn’t coming and neither is your loan modification.

If you got your loan during the boom, it was probably sold as part of a “securitized pool” and that is where our journey down the rabbit hole begins.

Leave your common sense behind, you won’t be needing that on this trip, things are a little backwards here.

Even before the ink was dry on your loan documents, literally, your loan had been pledged to part of a pool; the bank got back the money it loaned you and then bought a credit default swap to pay out in the event of a default. Given what they knew about some of the loans, that bet was a sure thing.

For more detail, see my blog at http://www.realtown.com/gwmantor/blog.

A lot of people made a tidy profit on your loan. And if you are in default, even more money will be made on your loan.

I have seen little to convince me that loan modifications or any government directed response will be a viable solution. According to the Government Accountability Office, as of last month, the government had provided some $1 million to banks in investor subsidies and incentive payments through its Home Affordable Modification Program.

That wouldn’t even be a respectable bonus for an entry level Wall Street data wonk.

It’s a band-aid on the San Andreas Fault.

Not long ago, the Treasury announced that half a million homeowners had enrolled in three-month trial loan modifications. The key words here are “had enrolled in.”

Those that have enrolled are getting the run around. Note this from an Associated Press report…“Government officials can’t say how many people have been turned down because of a typo, lost fax or an oversight by a poorly trained bank employee. But the Treasury Department acknowledges that far too many applicants have wrongly been rejected.”

An article in the Washington Post reported that in a very large sample of residential mortgages, only 3 percent of seriously delinquent borrowers received a modification of their mortgage that reduced their monthly payments in the year after they got into trouble, and only 8 percent of those borrowers received any kind of modification.

According to The Joint Economic Committee of Congress, the average loss to the lender is $50, 000 on mortgages actually foreclosed and resold. What isn’t clear is who they mean by “lender” as we know that the original lender sold the loan in tranches and we do not know who would be the party in interest.

One way to interpret that is that by foreclosing; the pretender lender actually stands to gain the selling price of the resold foreclosure, less $50,000. On a $200,000 sale that is a pretty good profit.

Nor, is that the only reason.

Consider this observation by Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. “Most important, there are no consequences to the banks for failure to do what they have promised to do.”

As a matter of fact, there are a host of potential consequences to modifying a mortgage that haven’t been discussed, including, but not limited to, the Pooling and Servicing agreements governing the relationship between the lender and the investor, accounting rules and the seeming conflicts arising from altering the terms of a security, and a lack of record as to the real parties in interest.

As it turns out, in most cases, there isn’t even a legally authorized individual with the authority to modify the terms of a note that is part of a security package. The future of loans that may have been unlawfully modified creates even more uncertainty.

The largest obstacle to a modification is the anticipation of the payout on the Credit Default Swaps. Because these are unregulated, some mortgages may have been insured for multiple times the actual loan amount.

Only a default, not a mortgage write down, will trigger the pay out on the swaps. So now you know why all that loan modification paperwork gets lost all of the time.

The more modifications banks do, the more requests they will get, so it is definitely in their best interest to make it as difficult as possible so as not to open the floodgates. This could lead to investor backlash for not protecting the security interests of their fiduciaries.

Remember, they sold the note and got their money back. Why would they settle for a couple of thousand dollars from the government when they can foreclose on houses, resell them and bank hundreds of thousands in profit and, by reselling them, they keep filling their securitization pools with new loans?

What is now becoming apparent is that it isn’t in the best interest of the banks to voluntarily modify most mortgages. If you need mortgage relief, you will probably need to initiate legal action, and you will need a lawyer familiar with this area of the law. But because many securitized mortgages are bullet-proof to foreclosure, you may not need a modification to obtain relief.

George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.

Mantor can be reached at GWMantor@aol.com.

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