Why can’t I get a mortgage modification?

21 Mar Why can’t I get a mortgage modification?

Many people ask me “Why is it so difficult to get a mortgage modification?”

They have false hopes in so-called “mortgage modification specialists” – often scam-artists who used to sell sub-prime mortgage loans. They can’t even make telephone contact with people at their “mortgage companies” – actually servicers for the “investors” who are supposed to be the true owners of their mortgage. Actually, that’s another topic for another day.

The real reason that you can’t get a mortgage modification is that the lenders are afraid to give you one.

Why?

  • Mark to Market
  • Waterfall

You probably haven’t heard these terms. But here’s what they mean and what they mean to you.

Mark to market means that assets are worth only what they can sell for today on the open market. For example, a mortgage for $300,000 on a house only worth $200,000 is probably worth the $150,000 which can be realized on the house after expenses of foreclosure plus whatever the $100,000 difference is worth on collection from the homeowner. If the homeowner files a bankruptcy case, that would be zero. So this mortgage is only worth about $150,000 to $175,000 at most. If a bank has to adjust all of its assets to what they are really worth today, just like this mortgage, the bank fears that it would have less assets than debts and would have to close. Not only that, the administration, the Treasury and politicians of all stripes fear systemic failure of all banks. Nobody wants nationalization of banks even if this may be inevitable. Mortgage modifications means that mortgages would need to be “marked to market.”

Waterfall is even more complicated. Think of your mortgage as being part of a slice of a layer cake. If you were a well-qualified borrower, your mortgage would be in the top-layer, for the safest of mortgages. If the mortgage is modified, the holders of the top-layers, the safest layer, would bear the loss. They don’t like that. They want the loss on a mortgage modification agreement to be borne by the bottom layers – the people that hold the riskiest mortgages – through a so-called “waterfall” provision in their contracts. If this fight can’t be resolved, there can’t be a mortgage modification.

So the big keys to getting real mortgage modifications are:

  1. Figuring out how to keep banks solvent by changing the “mark-to-market” accounting rules; and
  2. Getting mortgage holders to figure out among themselves how to allocate the risk and loss of a mortgage modification.

In the meantime, our property values continue to melt-down and our cities, towns and villages continue to suffer.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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