Meet Dave. He’s a homeowner in Sarasota, Florida who recently contacted Credit.com looking for help.
Dave can’t afford his mortgage payments and he’s been damned near killing himself to get a modification with Bank of America for almost two years. He’s submitted his paperwork five times. He’s been assured several times by several individual Bank of America employees that they’d personally see to it that his modification is properly handled. But every time he calls to follow up, the employee with whom he last spoke has vanished, leaving him to start the process all over again with someone new. Meanwhile, the proposed modification payment has doubled, his credit has been destroyed, and now he’s at the end of his rope. He’s considering the possibility of letting his home go into foreclosure, whatever the consequences.
This story is particularly galling given the recent statement from Bank of America Corp. Chief Executive, Brian Moynihan. Mr. Moynihan revealed to audience members at a financial services conference that Bank of American recently built up its team of foreclosure processors to 50,000 people, up from 30,000. I wonder if anyone ever suggested to Mr. Moynihan that we might all be better served if those 20,000 new employees were hired to process modifications instead of foreclosures?
Not to be the Master of the restating of the obvious, but I am not convinced that banks have much of an interest in modifying mortgages. The Internet is littered with comments from despondent homeowners—all feeling like residential roadkill—who don’t understand why BofA is so intent on throwing people out of, as opposed to keeping people in, their homes. In addition to countless stories of BofA mortgage modifications gone horribly awry, we’ve also read stories about short sales falling through because the bank opted to play the foreclosure card at the last minute.
[Related: Why the Home Loan Mod Program is Failing]
The reason, predictably, is money.
Bank of America services some two trillion dollars in mortgages. One would think they would have an incentive to keep homes out of foreclosure where they may sit vacant for months, if not years, in the face of today’s rapidly escalating inventory. Not to mention the fact that the foreclosed properties would also require some degree of upkeep, risk exposure to vandalism and finally sell, in all probability, for far less than the amount owed. But the way the system currently works, successful modifications are typically the least profitable option for loan servicers.
A recent Congressional Oversight Panel report confirmed what advocacy groups have been saying all along:
“Because the foreclosure process allows lenders to recover only a small fraction of the value of a mortgage loan, lenders should generally prefer to avoid foreclosure by voluntarily reducing a borrower’s monthly payments to affordable levels. (Yet), although lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure-related fees. As such, it may be in the servicer’s interest to move a delinquent loan to foreclosure as soon as possible.”
Modifications are only profitable to servicers if they are dragged out, allowing the servicer to add additional fees. When a home is foreclosed upon, then, this same servicer will often be first in line to collect on numerous fees (including junk fees reminiscent of the subprime mortgage heyday) that have accrued during the process.
Either way, the more misery inflicted upon the homeowner, the better for the bank.
There are also more practical concerns here. How does a bank quickly train some 20,000 new employees to help handle the most sensitive and difficult of financial transactions? Let’s hope these new BofA family members will be hired for more than their limber wrists —witness the recent robo-signing scandals. Then, again, there is no reason to imagine their performance will be judged by their “success” in helping consumers obtain successful modifications because it would appear that servicers and homeowners have radically different definitions of that word.
About the only folks who may well have any real upside in this unfolding property passion play are the guys who have underwriting experience. So, to all of the unemployed mortgage brokers out there – the ones who fueled the bubble by pushing “creative” and ill-conceived loan products: Bank of America might have a job for you.
Image by seiuhealthcare775nw, via Flickr