Q&A from the E-mailbag, by David M. Petrovich Executive Director SPOCH
A. Re-read the section in your loan documents which describe "default" and you may be surprised that missing a single, monthly payment may trigger default, and foreclosure. In practice, however, since loan servicers make a lot of money by charging late fees... they do not initiate foreclosure until/unless three or more consecutive payments are missed…. and in some cases 12 or more payments are missed before the lender authorizes its lawyers to foreclose.
Irrespective of what we hear or read about how anxious lenders are to modify delinquent mortgage loans … they aren’t. Default servicing is a cash cow bonanza for mortgage loan servicers.
You might think many mortgage loans which are not being paid mean huge losses to the investors who own the debt. Not so. Huge numbers of sub-prime mortgages which have been grouped together and pooled into securities carry private, derivative insurance (like bond performance insurance) provided by publicly bailed out companies like AIG. If the mortgage security isn’t performing as expected, the insurance kicks in and pays the investors…. who are made whole whether or not homeowners make their payments, or not. So, there is no financial incentive for the Investors to work with homeowners to restructure toxic loan terms.
Even though loan servicers, whose job it is to modify loans, are paid by the government to modify at-risk loans…. the loan servicers would lose money. The government incentives are actually less than what servicers earn in late fees and pre-foreclosure costs by keeping the loan in default.
Talk about a conflict of interest!
If mortgage holders and their servicers refuse to grant meaningful loan relief, let's replace them with efficient, nonprofit organizations whose corporate objective is to preserve continued homeownership and work for the best interests of the owners.
How? Pay 'em off and buy 'em out. Instead of spending taxpayer dollars to fund executive bonuses, or the purchase of corporate jets or luxurious retreats (never to be repaid) let's put the dollars to work serving the needs of our economy and ensuring that taxpayers continue to believe in the great American dream of homeownership.
Email your questions to: info@spoch.org www.spoch.org
David M. Petrovich is Executive Director of Society for Preservation of Continued Homeownership, a NJ non-profit organization which provides pre-foreclosure counseling to financially distressed homeowners. His most recent book, An Ethical Approach (to preforeclosure short sales) will be followed by, The Foreclosure.
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