Thursday, January 14, 2010

What's Behind the Mortgage Modification Program?

This Truthdig article reveals something pretty devastating, though perhaps not too surprising: mortgage customers having trouble making their payments, who need a modification to stave off bankruptcy and perhaps even homelessness, are being denied modifications because the owner(s) of the mortgage might actually lose money.

One customer who applied to her lender for a permanent (as opposed to a trial) loan modification was told she was approved and started making the lower payments. She never got any of the promised paperwork to sign. Some weeks later, while talking to customer service on an unrelated matter, she was told that she'd in fact been denied for the modification, and that late charges had accrued on her short payments.

What follows is the big reveal:
When she complained about the late fees (which were eventually canceled), she was passed to a different employee who told her she was being put back into a trial period. She didn’t understand why. Another representative finally told her that she’d been denied because of a negative “Net Present Value” test. The test is the calculation at the center of the Treasury Department’s program: It determines whether the loan’s owner (sometimes the lender, sometimes a mortgage-backed security’s investors) is likely to make more money modifying the loan or not. A negative result means the servicer has no obligation under the program to modify the loan and is a common reason for denial.

So, if the test reveals that the loan's owner will not make money, it's declined. This program was supposed to help the borrower, not necessarily the lender. I understand mortgage investors not wanting to lose money, but that's contrary to the purpose of the program. I can't imagine the architects of this program, in the Obama administration, telling lenders that they don't have to modify any loan if the modification means they'll lose money. But, what I guess this means is that homeowners will only get relief from their loan payments if they walk away from the loan and the lender forecloses. That's apparently the only time a lender will actually concede a loss.

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