Loan Modification - Why You Got Turned Down

By Author: Nick Adama
Total Articles: 197
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The most recent news of the Obama administration's Home Affordable Modification Program (HAMP) has been more bad news. Although more modifications are being completed on a cumulative basis, less than 10% of the applicants who qualify for a foreclosure solution under the terms of the plan are offered one by the mortgage servicers and banks. While this seems like a disastrous performance, it could have been expected.

One big roadblock for any loan modification plan is the pooling and servicing agreement (PSA). This is the agreement that dictates terms regarding how mortgages are pooled, securitized, sold to investors, and then serviced by other companies. And one of the terms many of these agreements contains makes it almost impossible for certain homeowners to be offered a modification.

In fact, some pooling and servicing agreements state that no more than 5% or 10% of the mortgages contained in the pool can be offered loan modifications in the case of default. So the US Treasury Department, in reporting that 9% of homeowners who qualify for plans have been given modifications, is simply reporting information that ...
... could have been estimated just by examining the structure of the mortgage industry.

These PSAs set a limit to how many mortgage modifications can be offered by servicers, and these companies may face liability from the trusts or investors that own the underlying loans if they offer too many workout plans to borrowers. They may find themselves in breach of the servicing terms they agreed to, even if it would allow more homeowners to avoid foreclosure, and they are not willing to take this risk.

This is one of the problems of the government getting involved in the mortgage markets. While it can appropriate $75 billion to effect more modifications, it has not changed or interfered directly in the PSAs that limit the number of such programs that can be offered to defaulted borrowers. Thus, the government is encouraging lenders to offer more plans than the legal, agreed-upon limit in the PSA.

If the lender has hit the limit in the number of loans it is allowed to modify, the mortgage may have to be removed from the pool in order to assist the borrowers. If this is the case, the owners may have to get a copy of the pooling and servicing agreement to find out what the servicing company is instructed to do for loss mitigation and how the mortgage security is constructed.

Especially in cases where the borrowers are having difficulty negotiating a loan modification or other solution to foreclosure, it may be helpful to examine the PSA. These agreements sometimes outline how companies are supposed to proceed in cases of default and where loss mitigation efforts would allow the borrowers to keep their homes. Having a competent attorney review the PSA could be extremely effective.

For securities that have been sold publicly, as many have, the PSA will be available through the Securities and Exchange Commission. Searching the SEC's website can provide the actual language of the PSA for homeowners to examine. What the borrowers must find out is the name of the trust in which their mortgage loan is located. This information may be found by submitting a request to the mortgage servicer.

When these limits are placed on servicing companies, both homeowners and investors in mortgage securities suffer. Of course, not every loan will be altered and not every modification will be successful, but it makes little sense for homeowners to be refused entry into the process just because other homeowners defaulting first and the limit imposed by the PSA has already been reached.
Nick publishes articles for the ForeclosureFish blog. These articles provide resources to borrowers facing foreclosure, describing various methods they can use to stop foreclosure. The site details numerous options, including loan modification, foreclosure refinancing, deed in lieu, filing bankruptcy, and more. Visit the site to find out more about how foreclosure works: http://www.foreclosurefish.com/