Lender Loan Service Fees Deter Homeowner Loan Modification

Lender Loan Service Fees Deter Homeowner Loan Modification

The Obama Administration this week assembled mortgage company executives in Washington to insist they expedite their efforts in modifying loan payments for homeowners that are descending into foreclosure. The Treasury requested that companies acquire more man power and initiate training to speed up the process of fielding applications for relief.

The limited capacity of mortgage companies is not what the Obama Administration fails to recognize in its $75 billion dollar program to prevent foreclosures. What they fail to recognize is that this process of modification is largely impeded by service fees on loans in default.  Mortgage companies are reluctant to modify home loans due to the profit involved in these delinquent fees.

The opportunities for additional revenue when a home is in foreclosure are considerable for mortgage companies and mortgage companies find themselves in an ethical dilemma. They are in conflict with their own financial interest regarding collecting the fees; their responsibility to their investors to recoup those fees and the public out cry to modify mortgage loans for homeowners whom have fallen into delinquency.

Mortgage companies including some of the nations largest banks are paid to pools of mortgage loans owned by investors and typically these companies collect a percentage of value of loans they service. Mortgage fees do not stop simply because a homeowner is in default and often increase; companies that service the mortgage loan still extract their share of these fees when the loan is pooled to investors.

The administrations foreclosure program allows a servicer who modifies a loan to collect one thousand dollars from the government, followed by one thousand dollars for the next three years for that loan. Servicers are contractually bound by the terms in the program to offer qualified borrowers modifications. Yet, experts in the field warn that often the incentives from the government are overshadowed by the benefits to collect fees on delinquent homes and the fees that are captured on the sale of the foreclosed home.

Typically mortgage companies collect late fees reaching around six percent of the monthly payments when borrowers fall behind. Late fees from sub prime mortgages actually constitute a large fraction of sub prime mortgage company’s profits.  One sub prime servicer reported nearly twelve percent of its revenue in 2007 was derived from fees.

Sub prime Companies contend that they would prefer this amount be zero as the cost of servicing a delinquent loan outweighs the profit from late fees. However the data on delinquent home loans doesn’t reflect this attitude.  The number of mortgages in the united states that were delinquent more than 90 days or more from June 2008 to June 2009 climbed from 1.8 million to nearly over 3 million. The number of loans that resulted in the bank taking ownership declined to 245,000 to 333,000, thus providing further evidence that mortgage companies are willing to let the loan fall into foreclosure than modify the loan.

Mortgage companies pay for services required to take over ownership and sell it. These services include title searches, insurance policies updates, new appraisal evaluations and legal filings that they own and share revenue with. Some companies have opened subsidiaries such as title companies to capture the revenue lost on foreclosed properties. Mortgage companies not only gain the business from the subsidiaries but are reimbursed for the payments when the house is sold. Mortgage investors get whatever is left. Investors don’t typical see the profit they are losing to servicers because the fees are entrenched in complex sales transaction.

Ultimately, at the end of the day, the Obama Administrations foreclosure plan isn’t enough inducement to change mortgage industry practices.

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