Recent data proves what practitioners in the Sacramento metropolitan area have already noted with regard to the loan Modifications being sought by individuals or corporations filing for Chapter 7 bankruptcy. On February 3, 2011 the Federal Reserve bank of Chicago released a study that shows that bank -held mortgage loans are one fourth to one third percent more likely to be modified than a similar securitized mortgage. The study also shows that individuals who receive the loan modification are almost 10 percent less likely to default on the new loan generated by the bank. Similarly, the Center for Public Integrity notes that homeowners are more likely to get their loan renegotiated if a bank owns their mortgage by a margin of 26% – 36%.
The practice of securitization consists of investment banks or brokers who bundle individual loans into a pool whereby investors are then able to buy a stake in the pool of loans with the lenders continuing to collect the monthly payments. This “securitization” is completely legal, but is widely blamed for contributing to the housing crash since it allowed institutional lenders to make high risk loans and then pass the risk of default onto the investors who purchased the bundled loan pools.
Borrowers have no say as to whether the loan on their residence has become securitized in this fashion. Unfortunately, these borrowers must deal with the consequences of their loan having been securitized if they seek a modification later. The increased chances of receiving a loan modification existing in a bank held loan appear to remain firm regardless of the borrower’s credit rating. The reasons for this may be due to coordination problems among investors, legal constraints, as well as a lack of servicers’ financial incentives (such that the servicers control the “loans” but do not have an ownership stake since it has been passed along to investors).
I am always interested to see data that sheds light on the current housing and financial situation being experienced by most of us in the nation. While securitization was initially blamed as a contributing factor to the housing crisis attention to the matter has since been shifted to other areas. A lender’s willingness to engage in loan modification discussions remains the biggest issue facing a home owner when trying to hold onto his or her residence. However, hopefully these types of studies will provide a framework to future policy makers who can attempt to resolve or avoid similar scenarios in the future.
As a Sacramento Bankruptcy Attorney I have heard from numerous individuals who have tried for months to get a modification on his or her home loan. Regardless, of whether or not a home loan has been securitized the homeowner has a right to be considered for a HAMP modification. If a person qualifies under HAMP their loan is required to be modified and made permanent. Since these questions are often complex and time consuming my offices are available to anyone who has considered exploring the option further.