A new report shows Loan modifications are more profitable than foreclosures

A new report shows Loan modifications are more profitable than foreclosures

The report by Center for Responsible Lending CRL, which was released this week, indicates loan modifications in most cases are still better than foreclosures. Some government officials are pushing for principal write downs and to assist homeowners as much as possible before foreclosing on the property. Servicers are extremely against principal write downs and a common myth is that Investors who own the mortgages are saying "no" to modifications. However, according to a Texas based lawyer Talcott Franklin, Investors are very open to modifications versus foreclosures. He has talked to many Investors and everyone that he has spoken to are in favor of modifications versus foreclosures. So why do so many servicers seem to blame the Investors for not willing to approve modifications including principal write downs.

So if it is the servicers not agreeing to do mortgage modifications because it affects their bottom line somehow, than they are not being objective and are only hurting themselves and the Investors. After all, their job is to service the loans, send out payment requests, do collection activity on past due mortgages and handle all communication between the homeowner and lender.

Meanwhile, the number of loan modifications pales in comparison to the number of foreclosures.

Foreclosure prevention programs have found themselves on the chopping block due to low and poor performance, and servicers have said the risk of borrowers who receive modifications falling behind again is pretty high.

But new data suggests that modifications and even write-downs in certain cases might actually be more beneficial to investors as well as struggling borrowers.

Some of the reasons why servicers are not pushing for modifications is the likely hood those same borrowers may end up re-defaulting in the future, but CRL says even taking into consideration re-defaulting homeowners it would still be more profitable than foreclosing.

Modifications are based on the Net present value test or NPV test, based on the results of the CRL NPV simulation study it shows that NPV ranks modifications as more profitable for investors. So why are modifications so hard to come by? It partly could be due to poor implementation of mortgage servicers, misalignment of incentives due to servicer compensation structure, lack of investor involvement, borrower confusion and poorly designed program eligibility.

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