Why Aren’t More Mortgage Modifications Done?

Lenders continue to stall, and refuse to cooperate in modifying mortgages, even where legally obligated to do so under federal law.  Law in the state of Indiana continues to allow foreclosure without meaningful discussion of other options.  The state run website, telling consumers “you can get help for free” is merely a forms gathering service for lenders, sending forms back and forth from consumer to lender.  Once the lender has the forms, all too often he tells the consumer he is not qualified for any help.  Thus there is no assistance, from any source, at any time, to tell the consumer what his rights are and how to get what he is entitled to receive in mortgage modification.

The Indiana statute was passed, effective July 1, 2009.  It provides for a “settlement conference” should the consumer elect to bargain with the lender instead of passively allowing foreclosure. The theory of the statute, on its face, is to give the homeowner a chance to ask and be educated on alternatives to foreclosure.

In practice, certain critical flaws have become apparent:  1) the government website is of no help to consumers in transmitting forms; 2) courts are not supervising settlement conferences and what actually takes place at those conferences; 3) lenders are refusing to obey the federal law on mortgage modifications and often do not attend settlement conferences or offer any alternatives to foreclosure.  These problems can be tracked back to the major flaw in the 2009 Indiana legislation:  it is permissive, not mandatory.  The statute says the lender may offer alternatives, but it does not say that he must offer alternatives to foreclosure.  The statute was created with the appearance of helping the consumer, but it was created “without teeth”.

Many of us don’t know it, but the federal government is by far the “biggest player” in the mortgage market, on a national basis.  Very few mortgages are made or paid today on a local basis, that is, the money doesn’t come from or go to Terre Haute or Kokomo, Indiana.  We have a variety of players now, in place of what used to the just one lender holding the loan he wrote; we now have lender correspondents, wholesalers, mortgage brokers, securitizers, investors, servicers, insurors, and packagers, all with a stake in the document, information, and payment stream of the American home mortgage.

It is not untrue to say that we have created even a global market in US home mortgages; but who is in charge?  The federal government owns, buys, sells, and insures the vast majority of US residential mortgages.  As such, the power of the federal government to affect foreclosure over time is immense.

But federal regulation is tricky; one rule conflicts with another, complex procedures and paperwork rule.  How to wade through the swamp of authorities and paper?

Fortunately in the mortgage market, two federal buyers and traders of mortgages are preeminent: the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).  Since they process a majority of American home loans, the government picked these two entities to be “point men” in the initiative to stop foreclosure, lowering mortgage payments if necessary to keep homeowners in their homes. Since “Fannie and Freddie” have become involved, loan modifications are happening on their loans, even though the pace is slow.