Mortgage service companies questioned about loan modification delays

Despite government efforts to make loan modification available to homeowners, those facing foreclosure are still encountering delays and resistance. Senior officials from the departments of the Treasury, Housing, and Urban Development called in representatives from these companies to respond to allegations that servicers failed to deliver.

The statistics, presented by the New York Times, are troubling. As of mid-July, there were 160,000 trial mortgage modifications made by servicing companies, with another 165,000 offers outstanding. The number of mortgages in the modification process pales in comparison to the more than 1.5 million properties that received a default or foreclosure notice in the first half of the year.

It may seem that the reason more farther behind without foreclosure being filed is because there are so many delinquencies and lenders have a backlog of foreclosure filings. But many believe differently. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans. Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

Data on delinquencies reinforces the notion that servicers are inclined to let problem loans float in purgatory — neither taking control of houses and selling them, nor modifying loans to give homeowners a break. Even more questionable is data reported from the realty research company First American Core Logic. From June 2008 to June 2009, the number of American mortgages that were 90 days or more delinquent soared from 1.8 million to nearly 3 million. During that period, the number of loans that resulted in the bank taking ownership of the home declined to 245,000, from 333,000.

Ultimately, the benefits of delinquency erode incentives for mortgage companies to dispose of troubled loans quickly, say experts, allowing distressed houses to decay and fall in value — a fact that many believe is of little interest to the servicer.

Shockingly, the major financial institutions deny that they would place their own profits ahead of the best interest of the borrower. One Bank of America official is quoted as saying: "that's just not the right thing to do". But there has been no explanation offered by banks and servicers for why the modification process is so slow, except for general claims about backlog. One thing is certain: loan modification is not happening for most people. And the mortgage service companies, who have a financial incentive for it not to happen, cannot seem to provide a reason