Foreclosure “Work-out” Myth

March 31, 2008

By Angie Moreschi:

The foreclosure work-out myth is being promoted by mortgage lenders right now, with catchy names like Countrywide’s “HOPE” program and the EMC “Mod Squad,” but it’s time to expose the hoax. Lenders are falling over themselves to make federal lawmakers believe they’re working with borrowers to avoid default. They cry, “We lose money, too, when we foreclose on a home!” It’s all about chilling the call for tougher regulations. “We’ll do the right thing, promise.”

Unfortunately, it’s smoke and mirrors all over again, just like the predatory loans that got us into this problem in the first place. The reality we’re seeing day after day is that lenders, despite their promises, are once again not living up to their end of the deal. They’re not really working with borrowers. Instead, they put homeowners into unworkable work-out plans, and get a few more thousand dollars out of them, before dropping the ax anyway. Families are being driven out of their homes unnecessarily. It’s just wrong, and it hurts the entire community.

What’s in it for them? Why won’t they work with borrowers? It all comes down to money:

  • Lenders can make extra money on loans in default, because they charge late fees, penalties, attorneys fees and bogus fees, like drive bys’ which essentially is a fee the company charges to drive by the house to make sure the lights are on and the borrower hasn’t vacated the property.These drive-bys’ have been as much as $45 a pop.
  • Consider the case of Countrywide. The company made $285 million in late fees in 2006. That was 7.5% of Countrywide’s servicing revenue in 2006. Up 20-percent from 2005.
  • A study by University of Iowa Professor Katherine Porter showed that half of the loans she examined in foreclosure had questionable fees added. Most fees were under $200 each, but collectively they could add up to millions of dollars for loan servicers. Take note that now that lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings.
  • The lenders know the borrower will do whatever they can to come up with the money to save their home, whether it’s borrowing from a relative or dipping into their 401K. Lenders like to keep borrowers in desperate positions.
  • A borrower’s loan is simply a pawn for investors to make money. The fact that it’s the biggest investment in your life doesn’t matter. What’s important to the lender is that it’s part of someone’s investment portfolio. The lenders have strict agreements with investors that often block them from modifying loans, without their approval. Why? Once again, it’s because loans in default can bring in more money.

So, let’s stop all the charades. The lenders can come up with all the catchy names they want for special programs to help homeowners facing default. None of it matters to the borrowers who end up being told, “Ah, sorry can’t help you. Our lawmakers need to wake up and understand the lenders, once again, are not doing what they promised to do.

Fool me once shame on you. Fool me twice shame on me.