Servicers Get Deserved Hit for Bungling Loan Modifications

Get the latest Wall Street investment tips on high finance, hedge funds and more. Read the up-to-date Wall Street news blog now.

The Home Affordable Modification Program that is designed to get homeowners out of their troubled mortgages is moving at a snail’s pace—and the servicers’ strategies are riddled with conflicts.

As a result, executives from 25 mortgage service companies were summoned to spend the day in Washington to brianstorm with Treasury and the Department of Housing and Urban Development to figure out how to solve the log jam and other problems.

Far too few homeowners are getting modification help either in debt forgiveness or reduction in interest rates. Even when loans are modified, the adjustments aren't sticking and the loan goes bad anyway.

To be fair, the servicers are swamped with an overload of bad mortgages to iron out. And it’s not just the folks who deserve modifications who are clogging the system. But Deloitte’s David Sisko, who leads the firm’s default management/loss mitigation service business, points out that some servicers are exacerbating the problem by cutting corners. At some point, he says, they’re just going to have to suck up and take a hit on their own profits to help the rest of us get through this deluge of problem loans. “There is no strong infrastructure to handle all of the ambiguities,” says Sisko. “Servicers are overwhelmed by volume and they are struggling to change the tires on a moving car. But they are also trying to do modifications cheaply with as little as expense as possible and they need to get passed that.”

Joseph R. Mason, an Associate Professor of Finance, Drexel University has been on the bandwagon of servicer abuse for years. He writes in a recent email missive that some servicers are exacerbating problems by working out loans in which they have an investor interest and which increase the value of their own holdings at the expense of their clients, or other senior bondholders and banks. “There is a growing realization that the senior investors ...are being exploited,” he writes.

Government wants more responsiveness from the servicers and that’ll force them to move faster ...but will it mean more efficiency?

Consider this potential problem: What if in the effort to push through as many modifications as possible, inadvertent violations of fair lending laws occur? Two people with identical credit standing, debt-to-income ratios and other pertinent qualifiers could theoretically get different deals, different rates. Suppose one of them is a minority, posits Sisko. It's bound to happen. Do we have a policy response for that, too? Stay tuned.

    Before it's here, it's on the Bloomberg Terminal.