Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior

Artical summary.                          

The paper addresses the question “why servicers foreclose when they should modify?”

The servicers have different ways to respond to loan mortgages modifications. As the servicers have different level of interests and incentives as compared to the investors or homeowners, the way that they get benefit and loss on their money is also different from those of investors. Therefore, they usually either don't care about if the investor is getting a loss through foreclosure or they prefer foreclosure over modification of loans because this is for the servicers’ own benefit. The big question and problem is that why don't servicers modify loans, and rather prefer foreclosures?

Well, "servicers, unlike investors or homeowners, do not generally lose money on a foreclosure."

In fact, they make money through foreclosure and loan modification costs them some amount of money. Servicers remain largely unaccountable for their poor performance in making loan modifications.

"Servicers have four main sources of income;

    The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
    Fees charged borrowers in default, including late fees and “process management fees";
    Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
    Income from investment interests in the pool of mortgage loans that the servicer is servicing."

According to the economists, the number of foreclosures can be decreased by increasing the number of delinquent loan modifications.

Congress, the President, the Federal Reserve Board, bankers, all agree to this solution of the issue. But the governmental loan modifications is not keeping the pace with foreclosures.

As the servicers benefit from foreclosures and for them loan modification is not a good personal option, they usually,...