Strategic Mortgage Defaults A Cause For Concern

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A new report from the National Consumer Law Center (NCLC) titled “Why servicer’s foreclose, when they should modify, and other puzzles of servicer behavior”, says the number of borrowers expected to walk away from their homes is projected to increase.

This is known as strategic default, when a borrower decides to stop making payments on a home mortgage even if the borrower can still afford the payments.  This is common in a down real estate market when home owners find they owe more on their home mortgage than it is currently worth and see no relief in the near term or any sign of recovery.

Currently, 16 million homeowners owe more on their mortgage than the home is worth, according to Moody’s Economy.com, which also estimates it to peak at 17.4 million mortgages in the third quarter of 2010.  Deutche Bank forecasts that number to reach 25 million (48%) homeowners  by the time prices stabilize.

The NCLC report examined foreclosures made from 1995 to 2009 and found that loan servicer’s make more money by offering forbearance ( a grace period of no payments for the purpose of stabilizing the borrowers financial picture) or payment plans instead of cutting principal or offering the option of reducing interest rate payments, otherwise known as loan modification.

The report found that financial incentives offered to mortgage servicers by the government, which were for the purpose of helping homeowners avoid foreclosure, do not equal the profits that can be made through foreclosures.  This does not give the servicers the incentive to help mortgage holders avoid foreclosure but rather more incentive to accept government tax dollars and allow foreclosures to continue.  Credit rating agencies and bond insurers do not monitor loan servicers but instead commonly push in favor of foreclosure instead of loan modification because of the same profit concerns.

“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”, according to the NCLC report.

Diane E. Thompson, an attorney with the NCLC and author of the study says, “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”.

This report suggests that the following changes be made to encourage more loan modifications and improve consumer confidence;

  • Regulate loan origination.
  • Mandate loan modification before foreclosure.
  • Limit fees charged to borrowers.
  • Provide for principle reduction on existing loans through the Home Affordable Modification Program  (HAMP).
  • Increase automated and standardized loan modification for borrowers in default.
  • Provide a safety net for unqualified borrowers for standardized modification.
  • Require loan servicer’s exhibit more transparency in terms, fees and documentation.

The NCLC report can be found at consumerlaw.org

Related posts:

  1. Mortgage Delinquencies Continue to Increase
  2. More Mortgage Woes Ahead
  3. Report: HAMP Program Only Making A Dent In Foreclosure Crisis
  4. FTC Proposes Up-Front Fee Ban for Mortgage Modifications
  5. Foreclosure Prevention Program, Fixer Upper Or Turn Key Ready?

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