Inefficient banks fall short in modifying mortgage loans

February 09, 2013

Inefficient banks fall short in modifying mortgage loans

Article provided by Durand & Associates, P.C.
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The financial crisis may be easing somewhat, but many Texas families still face the possible loss of a home to foreclosure. A federal program to help homeowners has been less effective than hoped because large banks have done such a poor job implementing its provisions.

Mortgage loan modifications save homes

When a borrower falls seriously behind on mortgage payments, there is an alternative to the bank foreclosing on the mortgage and recovering the property. Modifying the mortgage by lowering monthly payments can allow the homeowner to retain ownership of the home.

Salvaging the home is obviously beneficial to the borrower but is also advantageous for the lender. When a bank forecloses and resells a home, the property generally sells for much less than what it is worth, at significant loss to the bank. Banks therefore should be motivated to approve mortgage modifications.

Banks fail to fully utilize a federal program

Recognizing the value of loan modifications, the federal government instituted the Home Affordable Modification Program in 2009. HAMP offered subsidies to mortgage servicers to motivate them to modify loans.

A recent study analyzing the effects of HAMP was conducted by experts from the Office of the Comptroller of the Currency, Ohio State University and other prominent institutions. Unfortunately, the experts found that the HAMP incentive has been ineffective in improving loan modification rates for some of the largest banks.

The number of loan modifications was helped by HAMP but less than what was hoped for. If all banks in the country had performed at the pace set by the best-performing banks, according to the study, two million mortgages should have been modified by the end of this year. But the analysis found that only 1.2 million modifications have gone through, for a shortfall of 800,000 homes needlessly lost to foreclosure.

Problems are internal to the banks

The banks that performed well under the program had more and better trained staff. Some of the banks that did badly offered mortgage loan modifications at only half the rate of the better performing banks. One of the largest loan servers, Bank of America, has received poor marks from other analysts as well.

According to a survey of foreclosure-avoidance counselors, even after clients applied for a loan modification, many banks commonly went ahead with foreclosures before the applications had been processed.

Bank of America and other large banks serving Texans, such as Wells Fargo and Citi, are apparently not organized to handle loan modifications well. The authors of the study suggest that these banks specialize in processing payments rather than taking action to renegotiate loans with borrowers. To work effectively with HAMP, the banks would have had to refocus on providing adequate support and training for staff, directed at efficiently modifying loans.

More help for Texans

Texans who worry about mortgage foreclosure can find help by consulting with an experienced bankruptcy attorney. Bankruptcy attorneys understand how to deal with debt issues and can provide expert advice on how to avoid or delay foreclosure while regaining sound financial footing.