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October 29th, 2008

Why Does it Seem Banks Are Balking At Loan Mods?

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Dare I say it’s not the bank’s fault? According to RealtyTrac.com, lenders are taking over delinquent properties at double the normal rate. The point is, banks are becoming flooded with more loan modifications than they can effectively handle. In most cases, banks no longer “own” the loan having sold it the investor; the investor owns the mortgage, while the bank or other entity merely services the loan — collecting monthly payments, communicating with the investor, etc.

The non-profit organization HOPE NOW says they have helped prevent nearly 2.5 million foreclosures since July 2007; but critics say that isn’t enough to keep up with the problem. So why are banks struggling at an even slower pace to combat the mass rise in foreclosures?

The root of the problem comes from the sheer number of individual mortgages that have been grouped in Mortgage Backed Securities and sold to investors around the globe. The terms and conditions of many or all of these MBS limit the homeowner’s ability to restructure, or renegotiate the terms of their loan. Banks can run the risk of being sued if they deviate from the terms structured around the MBS. And the most discouraging fact of all is that, in certain markets, investors stand to recover more of their money from a foreclosure than they would in restructuring a loan.

When it comes to a MBS, there are multiple parties involved. “Trying to get every party to agree on the new structure of the loan has been the biggest problem,” said HSH VP Keith Gumbinger. Investors ask themselves this question: “Will I stand to lose more in a loan modification or in a foreclosure?”

The government has billions in line to buy up both whole loans and MBS. Once that process blossoms into full swing, there will be only one party’s decision regarding whether or not that loan deserves a modification.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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