When the current mortgage crisis started a lot of financial experts encouraged homeowners who were falling behind on their payments to contact their mortgage lenders. The conventional wisdom at the time was that the banks wanted to avoid foreclosure as much as the home owners.

Those financial experts aren’t so sure anymore, but the homeowners who have been through the confusing and frustrating processes created by the lenders are sure the convention wisdom is wrong.

One consumer in San Diego has been quoted saying “I have gone through the modification process but have been denied, although no clear explanation was provided. I have been seeking assistance and guidance from quite a few bank representatives and have only received rude, misguided information.”

Since this crisis started there have been a myriad of complaints from people who say they follow the instructions given, send in the documents requested several times, and are then told their paperwork has mysteriously disappeared.
Another consumer from New Jersey said “I faxed papers repeated times and was told that I need to fax more or that they never received them so they can start a modification, I made payments and they never credited my account. Now they call in October 2009 and they tell me that they stopped the modification because I never faxed out the papers. Is this a joke?”

These complaints span the entire industry, regardless of the lender. These troubled homeowners begin this process thinking they will receive a loan modification since the lenders don’t want foreclosure anymore than they do, and all they get is frustration due to indifference and incompetence.

A Wisconsin resident stated “We sent all information requested by certified mail, as the others have described, we have had to make contact. They do not respond. The usual answer is ‘Whoever told you that is wrong.’ I actually have a tape of one of their agents stating, ‘I can’t be responsible for what someone else told you.’ Should they not be required to respond in writing? Is this not a government-funded program?”

She’s right. The Treasury Department began the homeowner assistance program in March to encourage mortgage lenders to modify distressed loans to stem the growing tide of foreclosures. The entire process has proved unwieldy and slow, with no impact on the number of foreclosures.

The National Consumer Law Center, based in Boston, says there’s no great mystery here. The loan servicers are slow walking the process of assisting the homeowners because they reap a greater profit if the home goes into foreclosure. They explain that the loan servicers, unlike the homeowners, don’t risk financial loss on a foreclosure. Dianne Thompson, of the National Consumer Law Center explains that “One common-sense solution to the foreclosure crisis is to modify the loan terms in more instances [because] foreclosures are a costly ordeal for the homeowner, the lender, and the community. Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes.”

Why is that? It’s because the loan servicers that homeowners speak with don’t actually own the mortgage loan the vast majority of the time. They’re essentially a collection agencies passing the funds on to the investment groups that actually own the loans behind the scenes. So if the property goes into foreclosure the loan servicers that handle the modification process don’t lose anything, just the investors and the homeowners. So there’s no risk to the loan servicers—it’s actually more profitable for them to allow the loans to foreclose by denying principal and interest rate reductions because they make more money on forbearance agreements or outright foreclosures.

Loan modifications always cost the servicer something, so a loan servicer deciding between a loan modification and a foreclosure has to decide between a financial loss if the loan is modified, or the potential profit, with no penalty due to the lack of third-party oversight, if the home is foreclosed.

Congress and the Securities and Exchange Commission have failed to provide legislation on this matter. They have done nothing to remove the financial upside to foreclosure for financial institutions, nor have they dictated that loan modifications need to be put in place before foreclosure can be initiated. Until they step in homeowners will continue to lose their houses while the loan servicers profit.