Our Ontario foreclosure defense attorneys have long believed banks' reluctance to grant loan modifications was bad for them and their investors as well as for homeowners. So we were very interested to see a report with the same conclusion from a team of economists at the Center for Responsible Lending, a consumer advocate group. The Center put out a study March 22 (PDF) testing whether investors in a loan (whether or not it was securitized) ended up with more money in a foreclosure or a modification, using the net present value (NPV) test used by the federal loan modification program as well as many private programs. The authors concluded that under most circumstances, it made more financial sense to modify, even if the borrower ended up re-defaulting.
When considering a loan modification, the authors explain, banks must pit the costs of a foreclosure against the costs of lowering the borrower's payments. The NPV test is a common way to evaluate this, and the authors ran that test for 1,536 test cases using different circumstances like original loan size, size of the discount, property value and so on. If the result of that test shows a lower re-default rate than the actual re-default rate, the value of modifying the loan is higher than the value that can be gotten through foreclosure -- and thus, a loan modification should be granted. The CRL's calculations found that under most real-world circumstances, this should lead to a loan workout. For example, a loan modification that creates a 10% discount on the loan would be most profitable more than 86% of the time under current real-world self-cure rates.
Thus, the authors concluded that NPV tests should be spurring a much higher number of loan modifications than the market is currently seeing. Their conclusion suggests reasons for this mismatch, including "misalignment of incentives due to the servicer compensation structure."
In plain English, this is the same idea we've been repeating in this space for months. Loan servicers don't lose money on foreclosures; the banks or investors who own the loans do. However, loan servicers can make money collecting fees for late payments and other problems that typically precede a foreclosure. One advocate told HousingWire that this is a major reason for the mortgage crisis, and we agree. Having academic proof might be cold comfort for people who are facing foreclosure right now, but as Orange foreclosure defense lawyers, we think it's a great incentive for homeowners to keep fighting. If loan servicers are intentionally sabotaging or ignoring loan modifications in order to increase their profits, they're vulnerable to lawsuits accusing them of failing to give loan modifications serious consideration -- exactly the kind of suits we file.
Howard Law PC uses litigation as well as aggressive negotiations to get fair consideration for our clients' loan modification applications. If you've been struggling with this issue for months, you know firsthand that some loan servicers claim to lose paperwork repeatedly, demand documents they've never requested before or deny loan workouts for no reason or illegal reasons. These can be delaying tactics that strain credibility but effectively increase servicers' income at borrowers' expense. Our Corona foreclosure defense attorneys fight back by suing them to stop any pending foreclosure and get fair consideration from a neutral third party: a California judge.
If your family has been fighting for a loan modification, only to be ignored, denied and given a runaround, it's time to quit calling the servicer and start calling Howard Law instead. For a free, confidential case evaluation, send us an email or call toll-free at 1-800-872-5925.