Mortgage modification suit leaves homeowners in limbo, part one

In the recession, many people have been put through the financial wringer who, quite simply, don’t deserve the hand they have been dealt. A vast majority of people affected by the recession acted responsibly, worked hard to pay their bills on time, but simply could not make ends meet. Many of these people resorted to alternative measures in a desperate attempt to avoid bankruptcy or foreclosure, but in the end found themselves unable to do so.

One common alternative measure is a mortgage modification, which is often sought by homeowners who are no longer able to make high mortgage payments but who want to avoid foreclosure. However, millions of homeowners have been forced out of their homes after their modifications were denied. Following the filing of an unprecedented lawsuit by a large mortgage servicer against a trustee bank, the reason for a significant number of the modification denials has become apparent.

In the management of a mortgage, the mortgage servicer and the trustee both play the role of middleman. The servicer is responsible for collecting the homeowner’s mortgage payments and processing and evaluating modification requests. The trustee represents the investors backing a mortgage loan, ensuring that the actions taken by the servicer maximize the investors’ returns. Due to their roles, it is natural that these two parties come into conflict on a fairly regular basis.

This conflict is compounded by language in the servicers’ and trustees’ contracts. Often, the contracts explicitly allow modifications, or at least implicitly permit them with the consent of the investors. In many situations, however, the contract language is contradictory, leaving homeowners stuck with little information and even fewer options.

We will continue our discussion of this topic later this week.

Source: ProPublica, “Lawsuit Reveals How a Middleman is Blocking Mortgage Modifications for Homeowners“, Paul Kiel, 31 March 2011