Laptop Setup

The Banks Don’t Want to Modify Your Loan

Susan Murphy Aug. 7, 2015

“The California Homeowner Bill of Rights” was signed into law on July 12, 2012, by California Governor Jerry Brown to address the widespread negligence and fraud by Loan Servicers required by law to modify homeowners’ loans. The new “Foreclosure Prevention Act” defines the duties that Loan Servicers must perform and provides statutory penalties for nonperformance. Finally, in California, there are some teeth in the foreclosure laws.

Six years ago (or more) you may have gotten an interest-only or neg-am loan based on an inflated appraisal and stated income as part of a scheme by your Lenders to defraud investors of securitized Real Estate Investment Trusts (REITS). The Lender didn’t care whether you could afford the loan or not because they flipped your loan the way a developer flips property and passed all the risk to the investors that bought it and the government that insured it. Your lender made an instant profit for “brokering” your loan to the REIT and created an additional profit stream by retaining the servicing rights to your loan as they “serviced” your loan for the trust they sold it to.

Six years (or more) after the origination of these toxic loans borrowers can’t refinance because they are “underwater” (have more debt than their home is worth) and so turn to modification. In order to modify, borrowers must negotiate with their Loan Servicers that may decide who gets a loan modification based on the net present value (NPV) to the investor, or on other criteria known mostly to them. With Loan Servicers borrowers must remember they are dealing with the same entity (sometimes even the same financial corporation) that sold them their over-priced loan, to begin with.

Three reasons why Loan Servicers Don’t Want to Modify.

  • Servicers profit by your missed payments.

    • When borrowers default, their missed payments get added to the principal balance of their loan. Servicers get paid by the “holder” of a loan based on the total value of the loan pool that they service. The more payments you miss, the bigger your loan balance gets and the larger the pool that the servicer’s fees are based on.

  • Servicers profit by your default.

    • Servicers will often receive an upfront payment of six (6) months of service fees when a borrower defaults. In addition, they charge late fees, reinstatement fees, and other penalties that the “holder” of your loan may never be aware of.

  • Servicers incur costs to modify.

    • Servicers are required to repurchase loans from the investor in order to permanently modify the loan which represents a substantial cost and loss of revenue that can be avoided by keeping the loan in a state of lingering default until foreclosure.

California’s Foreclosure Reduction Act arrives just as property values are on the rise promising even greater rewards to those servicers that can foreclose quickly rather than modify. Loan Servicers will be more aggressive than ever as they seek to foreclose before homeowners realize their rights under the new statutes and attempt to exercise them in court. Unless you learn your rights and fight back, Loan Servicers will continue to get away with the same fraud and negligence they got away with before the new statutes.

Susan M. Murphy is a litigating attorney that sues the banks on behalf of homeowners, both in individual and mass-joinder cases.