So Why Won't Banks Modify Loans?

Managing Real Estate Broker with Arizona Real Estate Options

It is a curious thing why a bank would rather foreclose on a home than modify the borrower's loan. Well, not so curious if you understand the bank's position i.e. their stake in the game.

One thing to remember is just because the borrower receives a statement form Wells Fargo or B of A doesn't mean that bank is the holder of the note. In fact many times they are just servicing the loan.  Once loans are originated they are often sold off a few months later to an investor, to Fannie or Freddie or to another bank. Banks are in the business of originating loans again and again, not holding on to mortgages for 30 years. The company that services the loan has no real interest in the loan. They are hired to collect payments. They are also the ones to review and facilitate a loan modification. If you think about it, servicers don't truly have an incentive to modify loans. In many cases the servicer is paid a percentage of the loan amount so they certainly would not want to reduce principle. In addition, late fees are a huge source of income for the servicer and actually make more money keeping a borrower in default. They even are paid additional fees after a foreclosure sale.  Simply put, servicers profit from foreclosures and would lose money on a loan modification.

Although loan modifications would be best for the borrower as well as the owner of the note, it seems that as long as servicers are involved in the decision making process foreclosures will prevail.

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Comments (1)

Jeffrey DiMuria 321.223.6253 Waves Realty
Waves Realty - Melbourne, FL
Florida Space Coast Homes

I agree with what you are saying here...I also think part of the reason is the banks know at some point these issues go away...but the precedent of doing loan modifications is not something they really want to start.

Dec 17, 2010 05:17 AM