The phone call came late one afternoon, with a painful and familiar message: “I need to file for bankruptcy – fast. My home is about to be foreclosed and I thought I was arranging a loan modification with my mortgage company.”
Though you often read about all the various government programs designed to help homeowners keep their houses, the truth is quite upsetting: Mortgage modification is, by and large, an elusive dream, in large part due to a huge, but hidden, conflict of interest.
The big mortgage servicers – Chase, Citibank, Wells Fargo and Bank of America – take in the payments and distribute them to the entities that actually own the loans (often pension funds or mutual funds). They’re supposed to act only in the interests of their agents and, in good times, no conflict readily appears.
Trouble occurs when homeowners start to default on those mortgage payments and the same banks that service the primary mortgage also happen to own a home equity loan on that same house. The banks thus have an interest in insuring that the second loans get paid, even when the first does not. According to the New York Times (Aug. 15, 2010), “2/3 of all primary mortgages are serviced by banks who hold accompanying seconds.” That conflict of interest -- $450 billion!
The banks are suppose to take a back-seat role with their second mortgages, but, given their role in making the decisions on the first as servicers, they have little motivation to act in a way that renders their own holdings worthless.
There was a time when Congress was attempting to force modifications under judicial review in bankruptcy. That effort failed, unfortunately, due to the huge lobbying effort of the big banks. However, it was a good idea then, and it still is a good idea.
Until that day arrives, I’ll stop a foreclosure; I’ll eradicate a wholly unsecured second mortgage; I’ll handle arrearages over 5 years, but the modification of the first mortgage will remain an elusive dream.
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