It has been common knowledge for years that banks make money when they illegally deny a home loan modification. Media sources such as the New York Times have reported on the issue since as early as July 2009.
There are three parties to a mortgage: the homeowner, the investor, and the bank. The bank is the party who collects monthly mortgage payments from the homeowner. The bank is also the party that starts the foreclosure process, and tries to sell the home at a foreclosure auction.
The bank, in other words, services the mortgage. Hence, the bank is often referred to as the mortgage servicer. The bank, of course, does not service the mortgage for free. It is in business to make money, and not go broke. Fair enough.
The problem, however, as reported by the New York Times, is that the bank makes “lucrative fees on delinquent loans”. “Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.”
This is not good news for distressed homeowners. While a loan modification helps the homeowner, it prevents the bank from making more money. Not surprisingly, banks regularly deny loan modifications even when it is illegal to do so. For proof of this fact, one need only view the latest U.S. Treasury statistics on HAMP modifications, which reveal that banks typically only comply with their legal obligations around 10% of the time.
It is important for homeowners to realize that the banks are not on their side. Homeowners who trust their banks, and believe that the bank is genuinely working with them, are just setting themselves up for foreclosure.