How Far Modifications Will Cure Foreclosure Pains Need to be Checked

May 28th, 2009

It is now two years since the foreclosure crisis has been raging. The time has come to find out and check how far modifications will cure foreclosure pains.

In the first quarter of 2009 there have been 800,000 foreclosures – the term including all the stages of the process, according to RealtyTrac. It is an increase of 9% from the figures of the last quarter of 2008. One out of five mortgages has gone underwater with the loan value being more than the value of the house.

Anxious to help the troubled homeowners Congress has put together a bill – Helping Families Save Their Homes Act of 2009. It aims to put pressure on the lenders to modify troubled mortgages.

Theoretically the ideas of modifying mortgages are attractive. But the harsh reality is that the due amount is cleverly tagged on to the new mortgage and this naturally results in re-defaults. The borrowers, as before, cannot afford it.
The bill is offering handsome payment of $1,000 to the institutions for each loan modification. It will total to about $10 billion. It would also open a way for investors to gain from the modification at the cost of the investors who are the final owners of the mortgage.

These investors are jumbo speculators and sophisticated entities in the market. But many of these securities landed up in the portfolios of the mutual funds and the like. This means that many individual ordinary investors could be harmed if the bill became law.

Mortgage securities are regulated by covenants also known as agreements related to servicing and polling. It means the loan servicers are supposed to see to the best interests of the investors when they take decisions with the borrowers. This term has made many servicers shy away from modification of loans. Their contention is that altering the loan terms would harm the interests of the investors as the interest payments would be reduced. This could induce the investors to take legal action against the servicers.

The Congress bill aims to safeguard the servicers from potential legal suits if they proceed with modifications. The bill further stipulates that the servicers would not be under obligation to buy again the loans from a pool resulting from modification.
Many experts opine that the terms would allow many financial entities that had indulged in predatory lending and are at the same time loan servicers to escape justified punishment.