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Chicago Federal Reserve Study Finds Securitized Loans Less Likely to Be Modified

February 28, 2011

Our Rancho Cucamonga foreclosure defense lawyers were very interested to see a recent study confirming what some observers have through all along: when a loan is securitized, that loan is harder to modify later. That was the conclusion of a study released Feb. 3 by the Federal Reserve Bank of Chicago, one of the branches of the national Fed. As the Center for Public Integrity wrote in a Feb. 10 blog post, homeowners are a staggering 26 to 36 percent more likely to get a loan workout if a bank still owns their mortgages. In addition, the study found that borrowers whose loans were still with the originator had a 9 percent lower redefault rate, suggesting that such modifications are more efficient. The study drew on federal data from 2007-2009 about 34 million mortgages.

Securitization is the name for the practice of bundling a loan into a group of loans that investors can buy a stake in. Loan securitization was widely blamed for part of the housing crash, because it allowed mortgage lenders such as Countrywide Financial to make high-risk loans, including predatory loans, and then pass the risk on to investors while collecting monthly payments. Borrowers have no control over whether their loans are securitized, but as the Chicago Fed study showed, they have to deal with the results. The authors of the paper found the 26 to 36 percent number to be true regardless of borrower credit quality. While it didn't go into detail about why, the authors suggested that reasons could include "servicers' financial incentives (separation of ownership and control), legal constraints, and ... a coordination problem among investors."

We're pleased that this paper addresses securitization as a reason for problems with loan modifications. Securitization was blamed for loan modification problems early in the housing crisis, but attention has since moved to other issues. While our experience as Santa Ana loan modification attorneys has shown that lender unwillingness to seriously consider loan workouts plays a big role as well, we believe this study could be a useful guide for policymakers trying to avoid a repeat of the housing crisis. Just as securitization gave lenders an incentive to make loans they knew wouldn't be sustainable, triggering part of the housing collapse, it appears to have exacerbated that collapse by making it difficult for homeowners to deal with those unsustainable loans later. In both cases, it's worth questioning whether securitization should continue to be done at all, or done in the same way.

At Howard Law PC, we hear every day from borrowers who have struggled for months to get a loan modification, only to be ignored, given the runaround or mistreated by their loan servicers. Our Gardena foreclosure defense lawyers help clients fight back against lenders that seem determined to drain their savings before giving them any kind of permanent answer to their requests. Whether or not your loan has been securitized, you have a right to be seriously considered for a HAMP modification -- and if you qualify, you have a right to have it granted and made permanent. Unfortunately, we hear every day from Californians who have been incorrectly denied those rights, as well as people who were foreclosed on without the legally required chance to discuss alternatives. We file predatory lending lawsuits against lenders responsible for this type of illegal and unethical behavior.

If your loan servicer hasn't even pretended to give your loan modification request a serious chance and you're headed for foreclosure, you should talk to Howard Law right away. To learn more or set up a free consultation, send us a message online or call toll-free at 1-800-872-5925.