Homeowners in foreclosure case could see loan modifications
By Julie Schmit and Stephanie Armour
More homeowners may get home loan modifications under a potential settlement being discussed between banks and state investigatorsprobing improper foreclosures, but big hurdles remain, real estate experts say.
The 50 state attorneys general are investigating whether loan servicers used faulty documents to justify tens of thousands of foreclosures. News of preliminary settlement talks between banks and the investigators broke earlier this week, but Iowa Attorney General Tom Miller, who's heading the probe, says any settlement may be months away.
To get more loans modified, lawmakers and regulators will have to find ways to appease mortgage investors, who lose money if a loan's principal is reduced. Many modifications now involve lower interest rates or longer repayment periods. Such issues are likely to be discussed Thursday at the second congressional hearing this week on the nation's foreclosure crisis.
The slow pace of loan modifications has been widely noted. In the second quarter, companies that service loans initiated 273,419 modifications, according to the Comptroller of the Currency. That was up 18% from the first quarter. Loan modifications in the second quarter represented 13% of seriously delinquent borrowers. Increasing modifications is expected to be a big part of any settlement, if one is reached. But issues that'll have to be overcome are likely to include:
Many times, homeowners pursue loan modifications while a foreclosure against them moves forward. This so-called dual-track process is required by many mortgage investors and is an industrywide practice, according to written testimony that is expected to be delivered Thursday by Rebecca Mairone, Bank of America' s default-servicing executive. She says the bank wants "to be a partner" with the state attorneys general to change that industry practice.
Ending it completely would require buy-in from investors. They want the best possible return in the shortest amount of time so that homes don't deteriorate and lose more market value, says Anthony Sanders, professor of finance at George Mason University. What's more, there can be numerous investors in a pool of mortgages. Reaching agreement with them all will be difficult, says Robert Hager, a lawyer in Reno who represents homeowners.
When a homeowner defaults, banks often tack on extra costs for late fees or required insurance to protect the lender. Those costs can be very high, says Diane Thompson at the National Consumer Law Center. Because banks recover fees upon foreclosure, they may have more incentive to foreclose than to modify a loan, she says.
When a borrower seeks a loan modification, a different lender holding a second lien on the property frequently blocks it, because its interest could be wiped out or diminished. If a loan is modified, the first lien holder who may take a loss will want the second lien holder to take one, too, says Adam Levitin, associate law professor at Georgetown University. He says banks don't want to write down those losses.