There are quite a few people who have tried to work with their lender to modify their mortgage who have ended up in foreclosure for one reason or another.

It has even gotten to the point where the Obama Administration has enacted a plan to start fining lenders who can’t find a way to modify more loans.

The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said Friday. “Some of the firms ought to be embarrassed, and they will be.”

“We’re seeing a failure by some of the bigger banks on execution,” Mr. Barr said. “We’re going to be quite focused and direct on particular institutions that are not doing a good job.”

If the issue has gotten to this point – where fines are going to be handed out and the NYTimes is writing about it – it is clear that there are many people who are frustrated and wondering why it is so difficult to get a loan modification done.

Here is one possible answer as to why it is so difficult to get a loan modification done:

The FDIC has set up sweetheart deals with lenders called “loss sharing agreements” that financially encourage lenders to foreclose rather than modify a loan.

An excerpt from the most well-articulated thoughts on the subject that I have seen: (be prepared to be floored when you read the entire post)

When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to  simplify the terms. Some of the major details are:

  • OneWest would purchase all first mortgages at 70% of the current balance
  • OneWest would purchase Line of Equity Loans at 58% of the current balance.
  • In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.

How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:

  • The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
  • The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
  • ‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
  • Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.

At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.

Although I don’t pretend to know everything – it has generally been my experience that in America, banks are organizations that are designed to follow economic laws (translation: their sole intent is to make a profit).

So when wondering why your lender won’t modify your loan, you may be well advised to follow the trail of money – as in what is going to make your lender more money.

And if the FDIC is literally agreeing to pay hard dollars to the lender to foreclose rather than modify?

It seems to me that someone might want to investigate this issue further and then start talking about possible ways that it could be fixed.

Related Information:

Making Home Affordable Performance (see page 3 for individual lender performance)

Anatomy of a Government-Abetted Fraud: Why IndyMac Always Forecloses

NYTimes: Treasury Pushes Firms For Loan Relief

  • Julie Morris

    I have experienced this first hand with my clients. I was not aware of the “loss sharing agreements” but it makes perfect sense. I can tell you that OneWest bank (IndyMac bank) is the worst bank to work with, especially if the homeowner has a sale date. Now I understand why! I am afraid the single homeowner doesn’t stand a chance against the big bad bank’s. Great post!

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  • Denise

    Thank you so very much, I’ve passed this on to the lender who stole our home, literally, just so they know, I know. And I also passed this on to 2 Realtor companies who just couldn’t wrap their brains around the $315,555.86 the lender comp’d our home at before foreclosing, and putting it up for auction at 168,000.00. Not once did they send anyone to do an appraisal, nor did they bother to put a picture up, inside or out. Of course no one bid, they bought it back. This HAS GOT TO BE ILLEGAL?

    I own my own business, and I’m all “for profit,” but, the Feds part in this is seemingly illegal, and to be in bed with them, such as the lenders are, well?? If and when this all goes down, there best be a class action law suit in the ready. I want to be the first on the list.

    Any Attorney reading this, please contact me!
    I’ve got a story to tell, and so do thousand others I’m certain of it. Let’s get it started….let’s get it started!

  • Karen

    After trying for a year to obtain a loan modification, I finally received one one month after my ARM adjusted, raising my interest rate .5% Nice break they’re giving me.

  • Randi

    I am on my ninth month of trying to get my loan modified. We have applied now 3 times the other 2 times were denied because our paper wasnt up to date and with no phone call, e-mail or letter we were denied. My husband can call and they tell him one thing he can hang up and I call right back and its a completely different story. Example is they said we didn’t sign our tax returns wich I know we did I went through all the 82 pages of paper work we sent in 4 different times but anyways my husband hung up the phone called me and then I called the mortgage company right back and they said ohh noo we got them and they are signed so who do you believe. Just another way for the goverment to give us hope and then shoot us down

  • rick and jennie harbin

    we got aproved for a modification in oct 2008/ then country wide sold our mortg. over to b.o.a. and they wont work with us on a modification to lower our payments it has been 10 months now what can we do 7705544902 after 6:00 pm

  • pivotalrole

    I’m normally not a pessimist in any way, but when you hear about inside garbage like this, the glass is starting to look a little less than half full.

    I’ve been working for over a year to get help and was encouraged by BofA to run up any and all debt necessary to keep making my payments. The idea was that the more current my account, the better the chance I would have to receive help. Months into the melee I was then told that I had to be officially “past due” before they could even submit my request for help. So after tapping every resource at our disposal we had to purposefully miss a payment for them to even begin the process. Painfully, we wouldn’t have been able to make that payment anyway and I told them that a month prior.

    The latest is that I was told that the loan holder wasn’t participating in Help for Homeowners at all. The loan holder is Wells Fargo. Moments ago I got off the phone with WF and lo and behold, they certainly are participating. I’m sick of BofA outright lying to me. I’m just about ready to go the the news with this. I can’t tell you how many hours I’ve spent on the phone only to receive conflicting information from one call to the next. And no one is held responsible….ever. They could tell me that a unicorn was on its way with my modification documents and I would have zero recourse to call them on that. The only thing I ever get is, “I’m sorry they told you that, but they were wrong

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