In Loan Modification Program Left Homeowners’ Fate in Hands of Dysfunctional Industry, Pro Publica looks at the realities surrounding the governmental effort to reduce foreclosures by encouraging loan modifications, and points out one obvious but often ignored flaw in the plan: current programs leave both decision-making and execution in the hands of the very people who broke the system in the first place.
…the Obama administration bet the success of its foreclosure prevention program on the ability and willingness of that same troubled industry to help homeowners — and lost. The program, overseen by the Treasury Department, has been characterized largely by lax enforcement and deference to banks. [2] Instead, the program assumes that in return for modest incentives, servicers will develop the capacity to fairly and efficiently help homeowners modify their mortgages. But the industry hasn’t made the changes, which would involve a hit to their bottom line.
The article provides a nice, straightforward breakdown as to why the common assumption that “they’d be better off modifying the loan and getting something than foreclosing” doesn’t play out in practice, and how the interests of the mortgager servicer and the investor actually at risk when the homeowner defaults are rarely aligned.