Why is it so hard to modify a mortgage?

By Felix Salmon
June 29, 2009

Peter Goodman‘s infuriating and important report about the impossibility of modifying mortgages raises an interesting question: why is it so hard? There are three possible answers, I think.

The first is that it’s sheer incompetence — the banks, at least at senior levels, have lots of good will, but they just can’t find the staff to get this stuff done.

The second is that it’s greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.

The third explanation is somewhere in the middle: that it was always difficult to modify mortgages, that the massive wave of loan-mod applications has made it harder still, and that banks just move slowly, even if they do have good will.

My gut feeling is that the reality is somewhere between #2 and #3. If loan mods really made sense for the banks, they would be better at it than this, and they wouldn’t make life so unbearably hellish for their borrowers.

Once again, this is an area where a regulator with teeth could and should step in. If banks claim to be working hard to modify mortgages, they should be tested on that claim, and held to account if it proves to be false. If the carrot of getting a reliable stream of future mortgage payments, along with $1,000 from the government, isn’t enough, then add a stick as well. Someone needs to fix the current broken system, and it won’t be the banks themselves.


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OR, maybe some mortgages are just rotten to begin with and have no business getting modified at all. And it isn’t just the banks at fault, here; someone on the other side may have signed for a free lunch that never existed. Perish that thought, for a moment.

Posted by Griff | Report as abusive

Banks get massive tax credits for selling a home at a loss. I couldn’t figure out why a bank would rather sell a home for 100K when they could work with a borrower, get them more favorable terms, and keep a loan in place for $250K. Plain and simple, they lose less money if they foreclose on you.

Posted by R.Keeley | Report as abusive

It’s 1, 2 and 3, but also 4: the risk of redefault. The worst case scenario for a servicer is a loan mod that redefaults. That costs the servicer real money. Better simply to foreclose and stick the loss on the investors than modify and chance the redefault.

Posted by AJL | Report as abusive

Well, we certainly can’t rule out incompetence or greed by bank management. Maybe those toxic assets wouldn’t be so toxic, if the underwriting guidelines were realistic to begin with. But selling a rotten loan to an unsuspecting investor was such easy money at the tine. Now it’s still easier money for the banks to do what they know, ignore risk, and then foreclose (hopefully stripping some equity in the process), raise fees on other products and services, and come hell or high-water, make those big bonuses (or salaries, these days) for that oh-so-rare, hard-to-come-by “Talent” in bank management. Banks have no problem imposing forced liquidation on their clients. Why doesn’t the FED do the same. So, management doesn’t want to take losses, and would rather let these assets (with their pie-in-the-sky, imaginary valuations) sit, while they hope to find a buyer willing to pay the price the greedy bank presidents still want for their crap. Why not force banks to liquidate and put these mortgages in the hands of people who can then modify the loans and maybe actually help, instead of victimize borrowers. Those CEO’s may know how to read a balance sheet, but they still need to sign up for Ethics and Morals 101.