Predatory Servicing: Meet the Loss Mitigation Department

Posted By Cliff Tuttle | August 19, 2008

Posted by Cliff Tuttle

Mortgage foreclosure is about to commence. You are trying to reduce the delinquency, but they won’t accept partial payments. You feel hopelessly trapped. Then, out the darkness comes a ray of sunshine. The Loss Mitigation Department of your lender sends you a letter or pamphlet containing a message something like this:

“You may be able to save your home by modifying the existing mortgage. The interest rate and payments will be reduced. You will be able to start with a clean slate.”

This might seem to be too good to be true. In many cases it is.

Make no mistake about it, the term “loss mitigation” means mitigation of the lender’s loss. Mortgage foreclosures, especially when the fair market value of the collateral has declined or never equalled the appraised value, create large losses for lenders. If some of the delinquent mortgages can be reinstated on terms that enable those borrowers to keep paying, losses can be postponed or even avoided.

The tool that is being commonly used to accomplish this feat is the loan modification, sometimes referred to as a mortgage modification or just modification or “mod.” This process is distinct from a refinance, which involves originating a new loan. A refinance requires new disclosures under Regulation Z. It requires a that the borrow be given a three day right of recission. By contrast, modifications are largely unregulated. The same loan remains in place, but the terms are changed. Disclosures to the borrower are not required.

In the 1990’s, when interest rates were falling, modifications were frequently used to lower rates without the costs and paperwork involved in refinancing the loan. Until then, modifications were relatively rare. But the marketplace forced lenders to protect the loans in their portfolio from paying off early en masse. The lower return on an existing loan was better than finding new ones at the same rate. Since these modifications were highly beneficial to the borrower and since the trend at the time was deregulation, there was no effort to extend lending regulations to mods.

But it is now apparent that modifications can be used for less sanguine purposes. There were regulatory barriers to refinancing delinquent loans,but not to accomplishing the same objective though modification. Certain lenders, often in the subprime category, have been using modifications to do such things as “re-age” delinquencies, making their balance sheet appear better than it is.

Customers of some of the largest home lenders in America are reporting that they have accepted loan modification offers from loss mitigation departments, ostensibly set up for the purpose of stemming the tide of foreclosures, and lived up to their end of the bargain, only to have the lender proceed with foreclosure anyway. This has occurred, without explanation, after the borrower has sometimes paid a substantial fee and even several monthly payments. Reports of such incidents are widespread on the internet. To read two of them, from a strident consumer advocate website called Ripoff Report, click here and here.

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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