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Blog Post Details Financial Incentives for Lenders to Draw Out and Deny Loan Mods

November 15, 2010

Our Redlands foreclosure defense lawyers have been writing here for months, if not longer, that we believe lenders don't actually want to do loan modifications. The evidence for that belief mostly comes from our day-to-day work helping Californians win loan modifications, but a few studies have validated it by explaining and documenting the financial incentives to lenders. Two more such studies were the basis of a Nov. 9 blog post to the Washington Post's Ezra Klein blog. Guest blogger Mike Konczal argues that conflicts of interests are "baked right into the cake" by the way mortgage servicers and their fees are structured. To do that, he uses a paper -- "Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior" (PDF) from the National Consumer Law Center, and its accompanying chart.

The National Consumer Law Center's paper examines the relationship between foreclosure and income earned by the loan servicer. The blog post included a chart from that paper that laid out the different fees, expenses and other factors that incentivize servicers to foreclose or not, and influence the speed of foreclosure. That chart shows two factors that incentivize loan modifications, but nine that favor foreclosures instead. Konczal explains that fees built into the structure of a servicing agreement give servicers a financial incentive to keep borrowers in default. Not only do late fees pile up while a borrower is in a trial modification, but the monthly servicing fee is calculated as a percentage of the loan's principal. Or, as Konczal says, "This structure gives servicers a huge incentive to do make-work modifications, ineffectual interest-rate adjustments and principal forebearance." All of this encourages what he calls "lose-lose-lose foreclosures" rather than "win-win modifications" that are ultimately better for the lender as well as the borrower.

This data echoes what we see regularly, working with clients to help them fight unfair foreclosures. Our Paramount foreclosure defense attorneys have seen many cases in which the lender has granted a trial loan modification and allowed it to go on for months without deciding to make it permanent. When they do make a decision, they often revoke trial modifications due to paperwork problems, changes in income or other real or imagined issues. When they deny a permanent modification, banks can then require borrowers to pay back all of the balance of the "missed" payments plus late fees and anything else the lender tacks on. This behavior would make no sense if the goal were to grant loan modifications -- but it's not. We believe the goal is to make the most money possible by offering false promises to borrowers just long enough to squeeze out the last of their savings. This is unethical as well as bad for borrowers, but Konczal argues that it's also ultimately bad for lenders.

If this sounds like your situation and you're ready to fight back, you should call Howard Law PC for help. We have represented Californians fighting foreclosure since the beginning of the housing crisis, so we understand how to fight lenders that won't give clients a fair chance at a loan modification. In fact, even in cases where the clients have tried for many months to negotiate on their own, our Lake Elsinore foreclosure defense lawyers have often been able to get better results quickly. We believe that banks pay attention when attorneys are on the case, because they know we understand our clients' rights and will defend them aggressively if we find mistakes. In fact, the robo-signing scandal shows that lenders very commonly make mistakes, and we will use them whenever possible to get our clients fair, sustainable changes to their loans.

Howard Law offers free, confidential case evaluations, so you can tell us about your situation and learn more about us with no risk. To set up a meeting, call us toll-free at 1-800-872-5925 or send us a message through our website.