As foreclosures and defaults on home loans rise, mortgage lenders and companies are working out ways to help mortgagers stay in their houses.
When borrowers can't keep up with the mortgage payments, the lenders usually offer a loan modification, called "mod". This involves lowering the interest rate or increasing the loan term.
Foreclosures are rising fast because recently lenders rushed to make no-down-payment loans to people with weak or bad credit records. They also didn't always verify their income. The decline in housing prices in much of the country makes it hard for borrowers who fall behind to sell their homes for enough money to pay off the loan.
Mortgage lenders usually lose money on foreclosed homes. This is mainly because of legal and other costs. The need to sell those properties fast often compels them to sell the property below market value. Politicians are also pressing mortgage companies and lenders to minimize the damages foreclosures cause to people and neighborhoods.
Still, the effort to hold down foreclosures threatens to create clashes between mortgage companies and investors in securities backed by bundles of home loans, a $6 trillion market that has been shaken recently by losses on some of the riskier types of mortgage bonds. And because of the way these securities are sold, these efforts can pit groups of holders against each other.
Investors holding mortgage-backed bonds are watching nervously because mods may not always be in their best interest. Some investors fear that loan servicers will make too many mods. Generally, investors favor mods that ease a normally reliable borrower through a rough patch, but not those that merely buy time for an eminent foreclosure. If the borrower is unlikely to keep up with payments even after a mod, many investors would prefer that servicers pursue a foreclosure quickly, especially in regions where house prices are falling, reducing the value of the collateral. Servicers or lenders are required by their contracts to act in the interests of the investors and modify loans only when that can be expected to reduce losses. That puts servicers in the tricky position of trying to figure out which borrowers are basically sound and when it makes more sense to foreclose quickly. Even where there are no clashes among investors, servicers face restrictions on how they modify loans.
Source: RealEstateJournal
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