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Loan Modification: What's The Difference Between a Lender and a Servicer?

By
Education & Training with Mortgage Coach

Lender vs. Servicer: The Good Old Days

This concept is often confusing to people.

Back in the good old days, it was simple. You went to your local bank or Savings & Loan to get a mortgage. You spoke to your personal banker or loan officer who helped you get a loan.

The institution had lots of customers who put their money with the institution in a savings account, CD, checking account, etc. The institution paid interest to their customers, which gave them the right to use money to lend out to other customers.

You can see why banks did not want to give bad loans to people. They were lending the money of other customers and the loans remained on their books. Likewise, if a borrower got in trouble, they were very motivated to keep them in the home. This was often your local bank in your community. You had developed a personal relationship with them, and they were tied to the community. If the community could get hit hard by defaulting mortgages, so could the bank, hence they were highly motivated to work with you.

The Problem of “Securitization”

But, then this all changed. In the 80s, many Savings & Loans institutions went out of business, and in the 90s something called “securitization” became popular.

What exactly is “securitization”?

Essentially it is a process in which loans are pooled together and then sliced and diced into securities which can then be sold on the secondary market on Wall Street. So basically, you have no idea who actually owns your loan. Your loan probably started with a broker who used a loan originator who then immediately sold off your loan.

The administration of your loan is now handled by a company you’d think was your lender. You send your payment to them, but they are actually just a “servicer”. They get paid to service your loan, but they don’t actually own it.

Lender vs. Servicer: The Challenges

Unfortunately, since they only service your loan, getting a loan modification isn’t necessarily that easy. They are bound by lender guidelines which define what they are and aren’t allowed to do in the event that a borrower becomes financially distressed and must modify the terms of their loan.

To further complicate the issue, servicers generally represent numerous investor pools, all of whom have slightly different guidelines. If they all had the same guidelines, life would be much simpler. You could simply find out what the guidelines were and what kind of modifications were available, and from the outset of this process you’d know if you were going to get approved because there would be no mystery.

Instead, you have to go through a long a laborious process with your servicer to get your modification approved, and ultimately there is no guarantee that it will actually get approved. However, armed with a little knowledge, the process will at least be a demystified for you and you will dramatically increase your chances of getting approved.

*Sign up for my 100% Free 7 Lesson Online Course on Loan Modification.

Comments (14)

Grace Keng
Keller Williams Realty Cupertino - Cupertino, CA
CRS, CDPE (408) 799-8887

Thank you! NOw I know why a lot of loans cannot modified.

Grace Keng, Silicon Valley Realtor, www.gracekeng.com

May 04, 2009 06:47 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Jeremy,

So all these rules do not work with all the banks and servicers? How realistic are the chances of get the loan modification? What is the percentage of customers that get approved?

May 04, 2009 06:55 PM
Jeremy Kossen
Mortgage Coach - Orange, CA

Thanks Grace!

And, Jon....

I have not seen a published study of what percentage of loan modifications get approved.   I know that over half of borrowers were re-defaulting on their loans six months into their modification.   I also know that recently it was reported in the Wall Street Journal that only 1 out of 10 GMAC borrowers with homes in default qualified under the Obama rescue plan.

I can tell you, however, that over the last month it does seem like the lender/servicer/investors are approving a lot more loan modifications and doing it faster.   And most importantly, giving borrowers payments they can actually afford and not redefault on in six months.   This is definitely a good thing.

When you ask "how realistic is it that a customer will get approved?", I would say that if you add up all of a borrower's expense (everything including water, utilities, food, etc.), and calculate a 5% fully amortized payment on the outstanding balance including ALL arrearages and legal junk fees, and the borrower can pay all their expenses with a few hundred left over at the end of the month, the chances are very good they will get approved.  That's not a guarantee that they'll get a 5%, but it's a good benchmark to use.

What I see a lot of is people out of work and/or with serious declines in their income, who no matter what the bank was to do, they still couldn't afford the mortgage.   These people aren't going to get approved unless the bank is willing to reduce the principal, which is rare.  

They will, however, often times waive the junk legal fees to make it work, but in general they won't reduce principal.   Unless, you have an attorney or CPA who really knows what they're doing and works directly with the asset manager, and not loss mitigation.   I do know a few attorneys/CPAs who have this expertise, and have been successful in principal reduction.

 

May 04, 2009 07:11 PM
Harry F. D'Elia III
WEDO Real Estate and Beyond, LLC - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

It has been my experience that the borrower has to be in desparate circumstances before a loan mod is approved. One better not have assets. Many people have to not pay their mortgage for 60 days in order to get attention. Loan mod companies are charging nonrefundable fees and the loan mod does not work out. There was talks about a real estate agent being liable if one refers a loan mod company. I will not assume that responsibility.

May 04, 2009 09:20 PM
Jeremy Kossen
Mortgage Coach - Orange, CA

Harry,

Some loan modifications are getting approved for borrowers that are current but had a mortgage reset and will soon not be able to make their payment, but this is the exception rather than the rule.  Generally, you need to have missed 2 mortgage payments.   It's stupid because there are people that are trying their best to stay current, and they're seriously struggling, but they can't get approved there mortgage is considered a performing asset.  The priority is always on the NPAs (non performing assets).   And there are so many of these, that even if a bank could technically give a borrowerer who's current on their mortgage a modification, they're going to be low priority while the bank deals with the NPAs.

May 05, 2009 02:43 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Jeremy,

I really appreciate the time that you took to answer my questions. Thank you very much

May 05, 2009 12:35 PM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

it's such a complicated process. Most buyers never know 'how the money' works until I explain it to them when they get a mortgage.

Jan 26, 2013 11:24 PM
Susan Kessler
American Allstar Realty - Phoenix, AZ

Very informative and not many people understand this at all.  I happen to be working on a slight loan modification where I have direct contact with the owner of the note.  He told me what he would accept and I asked the escrow officer to handle the loan mod along with the sale of half the property. (raw land)  The escrow officer said I'LL HAVE TO GET APPROVAL FROM #####" (THE SERVICER)  So, even supposed professionals do not know the difference between the servicer and the lender.

Jan 27, 2013 12:10 AM
Kimo Jarrett
Cyber Properties - Huntington Beach, CA
Pro Lifestyle Solutions

Timely and concise, yet the challenge still remains despite the increase in loan mod approvals. I have seen some loan mods from homeowners but usually just a temporary modification for 5 to 7 years and without a reduction in principal. However, the mortgage payment is affordable and the homeowner keeps his home, so it works, albeit temporarily.

Jan 27, 2013 01:12 AM
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Thanks Jeremy for an informative and very helpful post.

Jan 27, 2013 06:50 PM
S W
Centerville, KS

Great explanation! Part of what got us into the housing bubble was selling these "sub-prime" securities in the secondary market and eventually these securities started defaulting causing the investors to lose millions! 

Jan 27, 2013 11:55 PM
John DL Arendsen
CREST "BACKYARD' HOMES, ON THE LEVEL General & Manufactured Home Contractor, TAG Real Estate Sales & Investments - Leucadia, CA
Crest Backyard Homes "ADU" dealer & RE Developer

Jeremy, I'm glat this subject has gone full circle. Great post. Here's one I like to share with you that I posted back in '09

Jan 28, 2013 01:59 AM
Jeffrey Burnham
Choice One Properties & Mgt - Las Vegas, NV
The Wizard

The sad truth is.. that Loan Modification is vastly different than Principal Reduction which is what many borrowers expect.

 In the majority of cases, it's foolish to pay double or triple what the home is currently worth. Although the bank will reduce the monthly amount paid they often do NOT lower the total amount due which is again, double or triple the current market value.

IF there is a true hardship (which is required to do either a Loan Mod OR a Short Sale), a Short Sale is typically (but not ALWAYS) the best option. My opinion anyways....

Jeff Burnham-"The Wizard", Encore Realty Group, Las Vegas NV

Jan 28, 2013 04:20 AM
Paddy Deighan MBA JD PhD
http://www.medicalandspaconsulting.com - Vail, CO
Paddy Deighan J.D. Ph.D

I work as legal adviser to two of teh largest banks/servicers. The loan mod numbers are staggering...2 out of 3 subsequently default

Jan 31, 2013 03:41 AM