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Why Many Loan Servicers Prefer Foreclosures to Modifications

(11/1/09) A number of industry experts agree that until mortgage servicers are no longer given the option of modifying a homeowner's mortgage, but are instead forced to, the number of distressed properties headed for foreclosure will not slow down. Modifying a distressed homeowner's mortgage must be required by the servicer and an independent overseer must participate in the process. Up to this point, the mortgage servicers have not been properly incentivised to accommodate borrowers with a modification of their loan and foreclosure has proven to be the path of least resistance as well as the more profitable option for servicers to pursue.

Loan servicers by and large were not set up to modify mortgages on a large scale and the government has been too slow in providing guidance, as well as adequate incentives, to help them get there quickly. How loan servicers are compensated by the government, under the Making Home Affordable program, still remains inadequately defined. A sizeable investment is required on the part of the servicers to get a system in place in order to perform large scale loan modifications: they include the hiring and training of employees as well as the technology, both software and hardware, required to implement a massive modification program. The underlying system required to pursue foreclosures however is already in place and the servicers recoup their expenses off the top in the foreclosure process. Therefore modifications are not as appealing to the servicers as foreclosures where they can more readily recoup their initial cost outlay. Until the government establishes a way to make loan modifications a more cost effective path to pursue for the mortgage servicers, it is unlikely they will occur in sufficient numbers to make a meaningful difference.

Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.