86 Wash. L. Rev. 755 (2011)
Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications

handle is hein.journals/washlr86 and id is 765 raw text is: Copyright C 2011 by Washington Law Review Association

FORECLOSING MODIFICATIONS: HOW SERVICER
INCENTIVES DISCOURAGE LOAN MODIFICATIONS
Diane E. Thompson*
Abstract: Despite record losses to investors, homeowners, and surrounding communities,
the foreclosure crisis continues to swell. Many commentators have urged an increase in the
number of loan modifications as a solution to the foreclosure crisis. The Obama
Administration created a program specifically designed to encourage modifications. Yet, the
number of foreclosures continues to outpace modifications.
One reason foreclosures outpace modifications is that the mortgage-modification decision
maker's incentives generally favor a foreclosure over a modification. The decision maker is
not the investor or the lender, but a separate entity, the servicer. The servicer's main function
is to collect and process payments from homeowners, and servicers do not necessarily have
any ownership interest in the loan. Servicers, unlike investors, generally recover all their hard
costs after a foreclosure, even if the home sells for less than the mortgage loan balance.
Servicers may even make money from foreclosures through charging borrowers and
investors fees that are ultimately recouped from the loan pool.
Existing regulatory guidance could be improved to facilitate modifications. Investors
need increased transparency to hold servicers accountable for failing to make modifications
when it is in the investors' best interests to make modifications. Fundamentally, servicers
must be required to make modifications when doing so would benefit the trust as a whole.
IN TR  O D U C TIO  N   ................................................................................ 758
I. THE FRAMEWORK OF MORTGAGE SERVICING
IMPEDES MODIFICATIONS ..................................................... 762
A. The Mortgage Market Has Evolved Into Fragmented
O w nersh  ip  ............................................................................  762
B. Decision Making Is Divorced from Ownership for Most
H om  e  L oans  .........................................................................  764
1.   W ho  Is  a  Servicer?  .................................................... 765
2.   Investors Seldom     Can or Do Influence the
Servicer's Actions on Loan Modifications ............... 768
3.   Servicers Make Modifications that Benefit
Themselves, Not Investors or Homeowners ............. 770
My colleagues at the National Consumer Law Center (NCLC) provided, as always, generous
and substantive support for this piece. Carolyn Carter, John Rao, Margot Saunders, Tara Twomey,
and Andrew Pizor all made significant contributions to the form and content of this paper. Alys
Cohen insisted that I write it. Denise Lisio and Jillian McLaughlin helped with the footnotes; Tamar
Malloy and Svetlana Ladan worked on the charts and the formatting. Beyond NCLC, Kathleen
Engel and Kevin Byers were generous enough to read and comment on this paper. All tables, where
not cited, represent the author's summary conclusions. All errors remain my own.

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