Many Americans are trying to work out new loans for their mortgages to avoid foreclosure–no surprise there. An article at CNNMoney.com gives an explanation that might explain why some Americans are finding it difficult to accomplish this task. The person who will decide whether or not the homeowner will get a new loan is a person called a “servicer”. These individuals are hired to process mortgage payments and manage loans, but they are not the owners of the notes.

These intermediaries are paid anywhere from 0.25% to 0.50% (for subprime loans) of the monthly mortgage payments to process those payments and funnel the rest to the investors that hold the securities backed by the mortgage. As such, they have little incentive to work out new loans when they get to keep the profits from late fees. Some servicers have been accused of holding up posting mortgage payments until past the due date so that they could collect these extra charges.

There are other factors that discourage servicers from doing workouts. They have a contractual fiduciary obligation to take action to maximize the return to the security holders. Because of these contractual obligations and the type of modifications they can offer; it sometimes requires a servicer to pursue foreclosures. There are also tax issues to consider from the tax exempt loan pools. If the percentage of loan modifications exceed 5% that could jeopardize the trust’s tax-exempt status. Another factor is frankly sheer volume. There is such a demand that the servicers cannot keep up. Mortgage delinquencies are up 112% during the first three months of 2008 compared to the same period last year.

Article: http://money.cnn.com/2008/05/15/real_estate/servicers_who_are_they/?postversion=2008051507

Chandra