Mortgage Modification Stymied by Lucrative Lender Late Fees

Much has been said about how the so-called securitization of mortgage loans—reselling small fractions of the loans to multiple investors, sometimes again and again—has stymied efforts to encourage lenders to renegotiate mortgage interest and other loan terms with struggling homeowners.

But another factor in addition to the difficulty of obtaining approval of loan modifications from multiple, far-distant creditors is also at work, according to the New York Times. Lenders make more money by hitting those in default with additional fees for late payments, appraisals, title searches, insurance and legal filings, often referring such lucrative business to companies in which they have a financial interest.

Thus, concerning those properties whose equity still exceeds the loan amount, even in a devalued real estate market, or the debtor finds a way to catch up in order to avoid losing the home, lenders can do better by simply playing a waiting game, according to the newspaper.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” attorney Diane Thompson testified before the Senate Banking Committee this month, on behalf of the National Consumer Law Center. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

Related coverage:

ABA Journal: "Battle on the Home Front"

ABAJournal.com: "Lawmaker to Lenders: Modify Mortgages, or We’ll Revive ‘Cramdown’ Bill"

Wall Street Journal (opinion): "Why Toxic Assets Are So Hard to Clean Up"