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Often, loan servicers have little incentive to help homeowners avoid foreclosure. With reform stalled in the Senate, the best hope for fixing the broken mortgage modification system may lie with the 50 state attorneys general....   >>>

Often, loan servicers have little incentive to help homeowners avoid foreclosure. With reform stalled in the Senate, the best hope for fixing the broken mortgage modification system may lie with the 50 state attorneys general.



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A mortgage servicing company makes money by charging fees based on the principal amount of the loan; reducing the principal reduces the servicer's income. Foreclosure guarantees reimbursement of a servicer's fees and costs; modification can make reimbursement harder. And when a loan is in default and heading toward foreclosure, a servicer can collect late fees and other charges. "For servicers, the true sweet spot lies in stretching out a delinquency without either a modification or a foreclosure," notes Diane E. Thompson of the National Consumer Law Center.



What's the remedy? In the best of all possible worlds, Congress would be seriously looking at legislation to fix some of these problems. It could change the bankruptcy law, which currently makes a first mortgage the only kind of loan that bankruptcy judges are barred from shrinking. (The House approved that change in 2009, but the Senate balked.) It could require banks to offer loan modifications before foreclosure, limit foreclosure fees and push states to expand mediation programs. These are all proposals made by Sen. Jack Reed (D-R.I.) in a bill he introduced in September.



[excerpts taken from the article linked below]