As reported by Bloomberg News, foreclosures are proving to be more profitable to mortgage servicers than Obama’s mortgage modification program.
The Treasury Department will begin this month to pay companies, including those here in South Florida, that collect mortgage payments and examine pleas for assistance a stipend of $1,500 for approving the sale of homes for less than the loan balance. This practice is known as a “short sale.”
The servicers will also get $1,000 for each completed modification under the government’s year-old mortgage modification program, and additional stipends over three years if borrowers stay current on their payments. These stipends can add up as there are currently 4.6 million homes that have payments more than 90 days overdue.
However, Diane Swonk, chief economist of Chicago-based Mesirow Financial, doesn’t think these stipends will be enough of an incentive for the mortgage servicers, who earn more money by foreclosing on a defaulted loan.
The current number of permanent loan changes through the government’s Home Affordable Modification Program (HAMP) seems to agree with Swonk’s rationale. There have only been 227,922 permanent loan changes and 780,951 trials as of March. HAMP “has made very little progress,” according to a report by Neil Barofsky, special inspector general for the Troubled Asset Relief Program.
HAMP’s lack of success may be due to servicers earning approximately $10,000 or more on a foreclosure of a $200,000 mortgage. “Servicers can easily make 10 times any of the government stipends being offered by simply foreclosing on the house,” Glen Russell, a real estate attorney in Fall River, Mass. said.
According to Alan White, a law professor at Valparaiso University in Indiana, the only silver lining for the government program is that companies may “make more money in the short term through a foreclosure, but they could possibly make more money in the long term with a modification.” This is only the case if they are confident the mortgage will stay current, because servicers are paid between one-tenth of a percentage point and half a percentage point of the loan’s balance for administering the accounts. However, with more than 4 million defaulting loans currently in the market, there may not be enough servicing infrastructure to handle it all and produce a higher number of permanent modifications. “The servicing industry was designed to deal with only 100,000 to 200,000 defaulted loans a year”, said Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. “There is not enough servicing infrastructure to handle the onslaught of loans,” he said.
Some critics believe that HAMP is simply delaying the unavoidable. According to Laurie Goodman, senior managing director at Amherst Securities Group LP in New York, approximately 7 million homes may still end up in foreclosure in the next three to four years even with the government programs. Her prediction is that some of those foreclosures will be by borrowers who re-defaulted after getting a modification. At the end of 2009, 48 percent of mortgages modified in the second quarter had missed at least on payment. This will only increase servicers profitability as they will then be able to proceed with a foreclosure and make-up their money when the property is sold.
Therefore, please contact our office today to discuss your legal options if your home is on the verge of foreclosure.