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New Report Says Mortgage Servicers Find Foreclosure Cheaper Than Loan Modifications

October 28, 2009

As Anaheim loan modification attorneys active in foreclosure issues throughout the housing downturn, we have come to believe that mortgage servicers don't truly want to modify loans. So we were pleased to see that belief backed up in a recent report from the National Consumer Law Center, a nonprofit legal services organization focused on consumer protection. reported Oct. 20 that the NCLC believes lenders see a bigger financial advantage in allowing foreclosure than they do in modifying loans. This flies in the face of the conventional wisdom, repeated throughout the media and business world, that foreclosure is an expensive burden that lenders would rather avoid.

In reality, the report says, servicers have a better financial incentive to allow foreclosures to go through. According to the article, the NCLC found that a loan modification costs servicers money for fixed overhead (such as hiring people to process applications), property valuations and other administrative costs. By contrast, a foreclosure may cost money to the mortgage holder -- which is frequently not the servicer -- but it also offers potential profit for loan servicers that can sell the property later on. And servicers face no legal or financial penalty for foreclosing, even when they could have worked with the borrower to avoid the foreclosure. In fact, the article said, financial incentives may even discourage servicers from allowing short sales, since foreclosures are sometimes faster and more profitable.

Diane Thompson, an attorney and author of the report, said the NCLC came to its conclusions by examining how and when mortgage servicers get paid during all steps of the foreclosure process. That is, she said, "...the way that a servicer gets paid entirely pushes the servicer to proceed with a foreclosure and not to do a loan modification." As Redlands loan modification lawyers, we are not at all surprised that profit motivates servicers' decisions on loan workouts. As we wrote on this blog earlier this year, the Boston Fed came to the exact same conclusion in its own study of loan modifications. Neither study explicitly connected this lack of a financial incentive with the terrible customer service for borrowers seeking a loan workout, but the connection seems clear to us. Under pressure from the federal government, mortgage servicers have paid lip service to loan modifications while erecting massive bureaucratic barriers ensuring that few borrowers will actually get one.

Howard Law LLP has aggressively represented borrowers seeking loan modifications throughout the housing downturn. Thanks to that experience, we are very familiar with the tricks and excuses servicers and mortgage holders use to discourage loan modifications. Even in cases where servicers repeatedly lost paperwork or incorrectly denied modifications, we have discovered that they tend to change their tunes when our Yorba Linda loan modification attorneys get involved -- because they know a lawsuit may soon follow. If appropriate, in fact, we can and have started new cases by filing lawsuits against servicers that have violated our clients' rights, a move that can stop foreclosure proceedings. Our goal is not only to stop foreclosure, but to keep clients in their homes with a fair and sustainable mortgage payment whenever possible.

Howard Law offers free, confidential case evaluations, so there's no risk and no cost to speak with us about your situation. To set up a consultation, you can reach us online anytime or call toll-free at 1-800-872-5925.