Loan Modification: How Your Lender Decides–The Truth

Dear Gentle Borrower:

Your story is very familiar. 

Since the mid-‘90’s, I have worked with many hundreds of borrowers through the years crafting forbearance repayment plans, loan modifications and varying forms of defaulted loan workouts.  Thousands, if not millions, of borrowers are facing your exact situation today.

Hearing your story, I can appreciate the frustration and time-intensiveness of the task of calling your mortgage servicing company first to discuss your situation.   Frequently, borrowers such as yourself, not in default, having never missed a mortgage payment, realizing the day will soon arrive when an ARM reset will create an impossible financial dilemma reach out to the loan servicing company (servicer) to try and seek a proactive solution.  The term for this situation, at least in many servicing venues and in the Fannie Mae Selling and Servicing Guide is referred to as “imminent default”.  

More often than not, when borrowers reach out to the servicer, as you have, they are told that because they are not in default on the mortgage obligation, no program exists to help them.   This is not exactly true, but as a practical matter, the customer service clerk in the call center has a very specific protocol to follow, and it usually does not include the “imminent default” circumstance.   The clerk sees the account is paid as agreed, no default exists, and therefore, no choice exists for the clerk to provide to the call-in borrower.   If the borrower persists, occasionally the borrower can reach a higher level of authority or a decision-maker in the servicer’s firm, but this is rare, and even then, due to the volume of loans the servicer handles and the nature of the processes in place to manage these loans, unless a circumstance exists that merits a “legal” review (such as one might find in the face of default or a compliance violation in the loan’s origination or servicing), the decision-maker will simply not have access to or even knowledge of the protocol that would address the call-in borrower’s case of “imminent default”.

To understand why this is, one must also understand the circumstances of the loan from the servicing or investor side of the table.   As a practical matter, knowing this information does nothing to lessen the stress or intensity of concern the borrower experiences, but what this information does provide is a frame of reference for why using a third-party loan modification service or firm may not necessarily be either a wise choice or even a helpful one.

When loans are originated, they are the “front porch” of a larger investment vehicle.   Distilling this explanation from a study on how mortgage-backed securities work and why, the simpler explanation is that one mortgage, perhaps your mortgage, is one of many in a given pool of mortgage loans.  This pool is created by a specific lender originating individual mortgage loans with the intent to “sell” them (after closing the loan) into the pool.  The pooled mortgage loans produce a specifically designed cashflow for a very specific investor (you may hear the servicer refer to the “investor” in your conversations with their representatives).  The investor may be a “fund” managed by a trustee (usually a large firm or a bank).  The trustee has a fiduciary obligation to its investment participants (those individuals or firms relying on the continuing cashflow or security of the continuing cashflow produced by the mortgages, including perhaps your own, making up the pool).  Of course, contractual relationships exist between the investor and the investment participants, and it is the responsibility of the trustee to ensure the continuing observation of the agreements in place governing these relationships.   These relationships are outlined in and governed by a “Pooling and Servicing Agreement”–PSA.   Likewise, similar contractual relationships exist between the investor and the company given the task of collecting the individual mortgage payments of the mortgages within the pool (the servicer).   The relationship between the investor and the servicer may be outlined in and governed by a “Servicer’s Agreement”–SA. 

So in this brief distillation, you see a distinction between the party that “owns” the mortgage loan (the one entitled to receive the payments you make and the owner of the promissory note) and the party that simply “collects” the payments paid on the mortgage loan (the one under contract to collect the monthly payments, issue annual interest statements, collect late charges, and generally administer the loan pursuant to the terms of the mortgage security instrument).

Within the documents that outline the terms of the contractual relationship between the investor and its investment participants, the PSA, will also typically reside the terms governing what is to take place should any one of the mortgage loans in the pool fall into a state of nonperformance (nonpayment of the mortgage loan through borrower default).   Usually, there may be a circumstance allowing for removal of the loan from the pool through repurchase or replacement by the firm who originated the loan.  Also, under specific guidelines, a nonperforming mortgage loan may be permitted to remain in the pool, provided, however, that this occurs within a very specific set of parameters.  Usually, the guideline for nonperforming mortgage loan disposition in the pool is covered in the PSA under the umbrella term, “Loss Mitigation”.  The “loss” referred to here is the loss which may be incurred by the Investor and ultimately by the investment participants.  Naturally, one would expect that provision should be made to try and avoid investment losses to the participants, so various methodologies and protocols are discussed to reduce, prevent or “mitigate” such actual or potential loss.  As part of the discussion on loss mitigation protocol, the PSA will outline the circumstances which may exist prior to initiating the protocol, such as actual OR IMMINENT borrower default in nonpayment of the monthly payments due under the mortgage loan due to unforeseen hardships, and then examples of what are considered “acceptable” or “justifiable” forms of hardships are discussed.  Within the context of these circumstances, the PSA will then discuss allowable methods of resolving or “working out” this form of borrower default or imminent default.

One form of borrower default resolution may include a forbearance repayment plan which allows the borrower to make monthly payments alongside the regularly scheduled monthly mortgage payment obligation (which is not always practical) or if the borrower has fallen behind in many monthly payments, a formalized recast of the loan obligation can be undertaken which would include simply adding all unpaid and delinquent interest to the current unpaid principal balance due under the mortgage loan , together with such other allowable advances, fees and costs as may have been incurred by the investor or its servicer in servicing the defaulted  loan.   In this case, a higher monthly payment almost always ensues, unless the PSA also permits “resetting” the obligation.  Resetting the obligation may involve extending the remaining term of the modified mortgage loan balance, and it may also include a reduction in the interest rate or converting the rate from an adjustable form to a fixed form, the ultimate objective being to ensure that the recast or reset mortgage loan obligation is returned to performing status within the pool—with a better than reasonable likelihood of successful reperformance.

In the document governing the relationship between the investor and the servicer, the SA, reside similar terms pertaining to “Loss Mitigation” which include all of the foregoing, and in addition, include the protocols to be followed in regard thereto when dealing directly with borrowers.  Given the fact that most servicers are managing anywhere from 50,000 to many hundreds of thousands of accounts, at a bare minimum, call centers are established to provide customer service, and field incoming borrower questions.  Many servicers hire third-party agencies to assist in managing incoming calls, and many of these agencies exist outside the United States due to the less expensive labor cost.  One such location is Mumbai, India, and many servicers have elected to use firms based in Mumbai to handle many of the less complex borrower call-in issues or even to assist in light debt collection for minor borrower default situations.

Bringing this now back home to the current state of affairs in the United States, with millions of borrowers facing actual or imminent default whether by reason of a resetting ARM interest rate, loss of job, health or other unexpected hardship, and coupled with the advent of the presidentially mandated loss mitigation programs (also referred to as foreclosure avoidance programs) which do not apply to many millions of mortgage loans, both investors and servicers are faced with the task of prioritizing loss mitigation review and handling.  Obviously, those cases which involve more immediate actual or potential loss will be managed first, and in all cases, that will mean nonperforming loans, or those for which borrowers have stopped making payments, actual borrower default.  With the volume of this type of nonperforming mortgage increasing, investors and servicers alike have very little if any time to devote to cases of performing mortgages, even in the face of “imminent default”, no actual borrower default.   By way of example, the firm which is contracted to handle all of Bank of America’s mortgage loans in workout reports a 100,000 per month caseload. 

So, having considered all of the foregoing, this sheds light on why the servicer may take many months to get to your situation, why the servicer may tell you that you do not “qualify” for assistance if you are not in default and – perhaps more importantly – why third party loan modification companies have sprung up, to “assist” in what is perceived to be a market need.

In reality, as you now know, unless the loan modification company has immediate access to the PSA for the specific pool in which your mortgage loan resides, together with the SA between the investor and your servicer, the loan modification company will never be able to even make an educated guess whether you would even qualify for a modification or a loan reset, much less be able to negotiate it for you, and moreover for a fee with a guaranteed outcome.

The possible exception to the foregoing is where the loan is originated and serviced under the Fannie Mae or Freddie Mac guidelines, and only then can the outcome be somewhat predictable.  But in such cases, spending time with a third party loan modification company for anything other than a simple assist in processing the prerequisite paperwork is usually a waste of consumer time.  Many of the ARM loans which are resetting were not originated under Fannie Mae or Freddie Mac guidelines, and these loans are also not currently serviced by Fannie or Freddie or pursuant to their mandates.

Your loan can be identified easily as a Fannie or Freddie loan by looking it up on the Fannie or Freddie websites, respectively, using the “loan look-up tool” available at either site. 

Another possible exception to the foregoing may exist where applicable regulatory noncompliance may be found in the origination of the mortgage loan or in the subsequent servicing of the mortgage loan.   In this regard, many loan modification companies offer “forensic audits” which purport to identify areas of regulatory noncompliance.  Many technology companies provide simple software which can be accessed online to identify various types of regulatory errors in origination, and typically these reports are reliable only to the extent of the data input, and they are relatively inexpensive.   The more detailed loan document level analysis and audit which may reveal additional noncompliance or even facts which can be used as a foundation for a defense to payment of the mortgage loan or foreclosure of the mortgage security can be obtained through a related regulatory compliance auditor, but should be obtained within the context of first an attorney review.  

So, as you move forward in your quest for a loan modification, consider the foregoing, because as you now know, what you are really paying for from a third-party loan modification service provider is nothing more than someone to stand for you in your place in line while you both wait for the servicer to execute on a plan that is pretty much pre-ordained, absent origination or servicing fraud or noncompliance.

As long as this was, I hope that it enhances your understanding of the process, as a whole.   My best wishes to you and to your family.

~ Lee Miller

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~ by leemillerusa on October 10, 2009.