A new report from the National Consumer Law Center (NCLC) describes how little noticed incentives prompt banks to deny relief to homeowners, which is why have several recent programs designed to encourage loan modifications have  failed to slow America’s still-worsening home mortgage foreclosure crisis. 

The report found that banks have found it cheaper to foreclose on homeowners than to offer loan modifications that would benefit homeowners and investors and in some cases homeowners who might be able to stay in their homes under a loan modification plan are being moved right past that option and on to foreclosure. 

The new NCLC report reveals that servicers, unlike investors or homeowners, generally don’t risk losing money on foreclosures.  In fact, servicers usually make money on foreclosures.

 “The country is in the midst of a foreclosure crisis of unprecedented proportions,” said report author Diane E. Thompson, an attorney with NCLC. “Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were at best only marginally affordable when made.

“One common sense solution to the foreclosure crisis is to modify the loan terms in more instances.  Foreclosures are a costly ordeal for the homeowner, the lender, and the community.  Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes.”

The report found that the servicers that most  profit from foreclosures are the banks or financial companies that usually collect payments and administer mortgage loans. They play a key role in the current foreclosure crisis, since original lenders frequently sell loans to investment trusts that rely on servicers to carry out most day to day transactions.  

 The NCLC report also found that the lack of third-party oversight allows servicers to pursue foreclosure instead of effective loan modifications that would benefit homeowners as well as investors. While credit rating agencies and bond insurers do monitor servicers, their oversight too often encourages servicers to foreclose.

The NCLC report includes a detailed examination of loans in foreclosure from 1995-2009 and how components of servicer compensation affected the likelihood and speed of foreclosure. It also looks at the rise of the servicer industry as a by-product of securitization; and the limited, but only effective oversight of servicers by credit rating agencies and bond insurers.

 “The people who could change the way servicers are doing business – Congress, the Administration, and the Securities and Exchange Commission – and the market participants who set the terms of engagement – credit rating agencies and bond insurers – have failed to provide servicers with the necessary incentives to reduce foreclosures and increase loan modifications,” said Thompson.

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