Loan Modification VS Foreclosure Fight

Loan Modification VS Foreclosure Fight

Daily, in the newspapers, radio, television and the internet, articles are written about the difficulty that borrowers face in getting loan modifications. These reports come not just from reporters, but from loan modification companies and also attorneys who are attempting to do the loan modifications. These reports fly in the face of what the US government is saying about getting loan modifications. (Usually, the government says that lenders are doing loan modifications, and that a homeowner should not pay to have one done.) The question becomes, “what is the truth”?
The problem is that most people, including loan modification companies and attorneys do not understand what they are fighting against. Nor are they helped to understand the fight because of incompetent “audit” companies who do not understand this either. LFI will attempt to shed light on this subject.
The Servicers/lenders of these loans have no vested interest in doing loan modifications. They are simply acting as “collection agencies” most of the time.
The loans were usually sold in the process known as securitization. Loans were “bundled together”, placed into Trusts and then “sliced and diced” into “tranches”, a pretty word for slice. The tranches were then sold to investors and securities dealers who then sliced and diced them again into smaller pieces. This process continued until it reached the point where the actual owners of the loans cannot easily be determined.
Who Controls The Loan?

To control the payment process, the Trust named a Trustee to see that different parties were paid monthly. The Trustees included US Bank, Citibank, Chase, Deutsche Bank, Lasalle Bank, Lehman, and others.
All factors related to the loan process is governed by the Pooling and Servicing Agreements for each trust. This Agreement covers all aspects of the transaction from the origination of the loan, to the final disbursements. This Agreement is where the problem in negotiating loan modifications and principal reductions occur.
The Agreements all have similar language regarding loan modifications. Paraphrased, the Agreements authorize the Master Service to do loan modifications when the default of a particular loan is inevitable or likely. It is this phrase that “prevents” servicers from modifying a loan that the borrower is up to date on payments.
To make matters worse, the Servicer is bound by the Agreement to determine what will be in the best interests of the Trust. If more money can be made by foreclosing and liquidating the property instead of doing a loan modification, then the Servicer must foreclose. The process for doing the calculations to determine what is in the best interest is subjective at best, and each Servicer is likely to approach it differently.
It Only Gets Worse!

To further complicate the issue, when reading the Pooling and Servicing Agreement, there is a section entitled “Advances”. Simply put, this section states that for any homeowner who missed a payment, the Master Servicer must make that payment to the Trust from its own money. The homeowner keeps missing payments, the Master Servicer keeps making the payments to the Trust. This process continues until one of several events can occur:
The homeowner brings the loan up to date, re-institution, by paying the back-owed money.
The Master Servicer determines that the chances of repayment are nil, so foreclosure is initiated and accomplished.
A Loan modification is worked out.
Swapping out the bad loan by replacing it with a “good loan”.
The problem with these solutions is that the only way that the Master Servicer can be “refunded” the Advannces, is by the loan being brought up to date, or the foreclosure completed.
Now, imagine the number of homeowners behind in payments. The Master Servicer has put money out on each of these loans, and they are now severely strapped for cash. The easiest method for the Master Servicer to get back the Advances is to…………..FORECLOSE.
There, we have thee problem. The Master Servicer has its own interests in mind. By foreclosing, they no longer make the Payment Advances, and the Advanced Money is returned to them.
Where Did The TARP Funds Go?

An aside to this scenario…….it now becomes evident what the TARP funds issued to the banks by the US Government is for. It allows the banks, actually the Master Servicers to have the funds to keep operating. As more foreclosures occur, the TARP funds keep the bank leveraged so that the doors remain open.