Borrowers often turn to Chapter 13 bankruptcy when they fall behind in mortgage payments. Chapter 13 can usually stop foreclosures by giving the homeowner three to five years to cure the missed payments while maintaining the ongoing monthly payments. Chapter 13 can not change the ongoing payment amount or lower interest rates. Homeowners turn to their mortgage companies for some relief but often hit a brick wall.
Mortgage companies have many reasons not to work with troubled borrowers, and one of them is they don’t want to risk undermining their buy-back agreements. When a borrower takes out a mortgage, the original mortgage company usually turns around and sells the loan to a group of investors. In some cases, the mortgage company offers an incentive to the investors which lowers the risk they take in taking the loans. This comes in the form of an agreement from the original mortgage company to buy back the loan if it turns out to be a bad loan.
Loans that have been modified from the original terms of the loan may not be subject to the buy-back agreement, and that helps to explain one reason why servicers may not be willing to work with borrowers in financial distress. If the servicer can get its money back when a loan goes bad, it has little incentive to work with a buyer to help out. The servicer may get more money from the original mortgage company than from helping the homeowner keep the house.
In a NY Times article published August 23, 2007 and written by Gretchen Morgenson, it was reported that the recent troubles that Countrywide is having may prevent them from honoring buyback agreements it made with some investors if the homeowners can’t pay. What this means to homeowners who need help is yet to be seen as the investment groups find themselves the owners of loans in default that Countrywide won’t take back.
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