Loan Modifications Fall Into Default and Worsens Foreclosure Situation

April 30th, 2009 | Tags: Foreclosure Notice

A recent survey has shown that loan modifications have led to further defaults worsening the foreclosure situation. Professor Alan M White of Valparaiso University in his report ‘De-leveraging The American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications’ noted “more than nine out of ten voluntary mortgage modifications in 2008 involved no cancellation of principal, past due interest or even late fees or expenses. The typical modification requires the homeowner to capitalize unpaid amounts or to convert them to a balloon payment”. The payments are merely shifted to the fag end of the loan. Thus the lenders are not sincere in their efforts to give relief. Consequently half of the modified loans again fall into default within 6 months of being altered.

The study of Professor White found that the terms of the contracts encourage the servicing companies to proceed with foreclosure. He wrote, “Mortgage servicer compensation (for securitized mortgages) is governed by pooling and servicing agreements (“PSAs”). Servicers receive income from a fixed portion of monthly interest payments actually received, from late fees and other default charges, and from the interest on funds held for investors or escrow. On the other hand they typically must advance interest to investors when the borrower doesn\’t make a payment. They also advance funds to third parties, like lawyers, during the foreclosure process. The servicer recovers its advances only when the borrower eventually brings payments current, or when a foreclosure sale is completed. However, if a delinquent mortgage is modified, the servicer will not recover the advances made to investors on that account until the borrower repays the servicer. This is particularly problematic for the servicer when the advances are deferred in a balloon payment due in thirty years.”

Thus these agreements point the way towards damaging foreclosures. More and more houses are dumped in the market resulting in the pushing down of the prices in the neighbourhood. It creates a “death spiral.”

Bradford and his team mates performing autopsies on these mortgages have found enough evidence for gross legal violence. Their findings can be used by the licensed attorneys of the locality in each state to take legal steps against the lenders. At the least these findings can be used as a stick to cow down the recalcitrant lenders. Bradford opined that nearly 85% of the total number of mortgages may be legally invalid because of lapses like missing notes, defective notices and fraudulent appraisals. Several borrowers who have made use of these suggestions have greatly benefited.