By Tanya Dennis
People may wonder why some homeowners in need never seem to obtain loan modifications from their banks. Though they submit the paperwork, it is lost over and over again, and they are asked to resubmit the application.
The whole process becomes clearer when we hear what home loan modification expert Catherine Gheen has to say: the federal government pays a bank $3,000 every time someone submits and resubmits an application to the “Making Homes Affordable” HAMP program.
Green says that out of 100 applications for loan modifications only 10 to 20 percent are granted. Banks make so much money from foreclosures that they often have no incentive to work out a deal with desperate homeowners.
The truth, said Gheen, is that “Banks knew back in 2005 – 2006, when they were granting… negative amortization loans, selling a shack for a half million dollars, that a large number of homeowners were doomed to failure.”
So they created something called “Pool Servicing Agreements” between themselves “to protect their interests, ” she said.
The banks pooled and continue to pool mortgages in “tranches” or bundles. For example, Wells Fargo and Washington Mutual take their bundled mortgages and sell them to US Bank or GMAC, in the process creating a Pool Servicing Agreement, a 144-page page document that lays out what the banks will or will not do when the borrower gets into trouble.
The Pool Servicing Agreement states whether the banks will allow modifications or short sells or no compromise at all. The only consideration a distressed homeowner may receive in these agreements is that banks may reinstate the loan under the original terms. However, in most Pool Servicing Agreements banks only accept foreclosure.
When banks pool their loans into mortgage-backed securities, securities whose value is based upon the cost of your mortgage, they also sell them to another bank when the homeowner defaults.
“Look at the notice of default.” Gheen said. “Once the borrower gets the notice of default, that’s when paper transfers and the Pool Servicing Agreement kicks in. It’s the same for Freddie Mae and Fannie Mac loans. Per their agreement with each bunch of loans, the foreclosing official presents a trustee number linked to each mortgage that reveals what the lender will or will not do, so it’s really not about the borrower at that point. “
Gheen continued, “The second way the banks get paid is by a “Loss Sharing Agreement “with the Federal Deposit Insurance Corporation (FDIC). This agreement assesses bank losses when the borrower defaults, and the FDIC reimburses the banks 90 percent of their loss. For example, if the bank’s loss amounts to $500 million, the FDIC reimburses the bank $450 million.”
“The third way banks get paid is when the bank sells your property as Real Estate owned by the Bank (REO).”
“The reason it is so difficult for homeowners to receive a modification is that the banks get paid three times for foreclosing on homes, so there is no incentive for them to deal with the homeowner.”
“The forth way banks get paid is when they do agree to do a modification. The federal government pays the bank $3,000 for every application it receives for the government’s “Making Homes Affordable” HAMP program. When the banks “lose” applications, the borrower has to reapply over and over again. Each time they reapply the banks get paid another $3,000”
“The only way banks are going to come to the table and deal fairly with homeowners is if the government compensates them totally for their losses, and once again through taxes, the homeowner and non-homeowners are left holding the bag.”