Banks Hate Mortgage Modifications, Love Lawyers

This weekend on the radio, there was an interesting discussion among a handful of financial and mortgage experts about the banking industry's current fascination with loan modification programs. The participants in the discussion came up with some very good points about the modifications that lenders are currently offering to homeowners in foreclosure trying to lower their monthly bills and how banks use attorneys to pursue foreclosure but do not want to deal with a homeowner's legal representation.

First of all, the banks are beginning to get into the loan modification game because of simple survival concerns. On a mortgage with a high interest rate, they may initiate negotiations with borrowers to lower the rate from, for example, 8% to 5%. Most borrowers who are behind in payments and facing a financial setback may view this as an exceedingly good deal and not hesitate to take it.

However, the banks' enthusiasm to begin modifying some mortgages is based only on short-term survival concerns. Lowering the rate by only a couple of percentage points is just not helping many homeowners. Within six months of a loan modification, borrowers are falling behind again and may even end up right back in foreclosure.

This gives the financial industry all the ammunition it needs when it goes before the United States Congress, states it has been attempting to help homeowners, the modifications are just not working as borrowers fall behind again, and it would be great if the Congress could just give the banks a few billion dollars more to see them through the economic depression.

The lawmakers in Congress, of course, acquiesce to the banks' demands, hand them over several billion more dollars of money taken from taxpayers -- the very people the banks are supposed to be modifying loans for -- and send the lenders back to the foreclosure drawing board. The lenders, in turn, go right back to offering bad modifications and then sending their attorneys in once the homeowners redefault.

This is one more reason why banks love their own purchased lawyers but simply hate dealing with a lawyer who has the morals and ethics to help borrowers facing foreclosure. Some banks are now even recommending that borrowers do not get legal representation when attempting to work out an alternative to foreclosure.

Banks are pushing this line on homeowners for the same reason they originally pushed subrpime, stated income, and no documentation mortgages -- it works out for the banks over the long term but hurts borrowers. Originally, the foreclosure process used to have just a couple of steps:

1. Homeowners fall behind on payments.
2. Foreclosure process begins.

Now, bowing to political pressure, banks have added another step, although the destination is the same:

1. Homeowners fall behind on payments.
2. Banks offer doomed to fail mortgage modification.
3. Homeowners fall behind on modification.
4. Foreclosure process begins.

By offering the poor loan modification solution to borrowers, banks can claim political cover later on when the plan fails. Homeowners are not aware of their rights during foreclosure, so they fall for the bank's offer of a reduced interest rate, even though they know they will not be able to make the payments for the long term.

The lenders have always relied on the inability of borrowers to understand the complicated loan documents they sign to purchase their home. Banks themselves do not understand the documents, but they know that they can create enough money out of thin air to purchase lawyers and whole court systems that will interpret the loan paperwork in the interests of the mortgage companies.

To conclude, banks are beginning to offer loan modifications they know will later default for two primary reasons. First, it gives them political cover when they ask for more bailouts from Congress later on. And two, offering a modification preempts the homeowners' search for a company or lawyer who can help them negotiate a much better deal or determine what lending laws the bank has violated. But this preemption almost always ends up as a beneficial solution for banks and a terrible one for borrowers.

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