Q Why is it so hard to make mortgage modifications work?
A With the collapse of the housing market, the number of borrowers experiencing some type of distress has reached historic proportions. One-fourth of homeowners owe more than their homes are worth, 17 percent are behind in their payments, and experts forecast as many as 13 million foreclosures over the next five years.
In response, the government has initiated various loan modification programs, beginning in 2008 and continuing with the Home Affordable Modification Program unveiled in early 2009.
Yet these efforts have been conspicuously ineffective, yielding only 170,000 permanent modifications. Given that a foreclosure costs the lender 30 percent to 60 percent of the loan value, why aren’t more loans being renegotiated?
One obstacle is securitization. Mortgages originated by a bank are usually sold to an investment bank or a Government Sponsored Enterprise like Fannie Mae or Freddie Mac. These loans are bundled into types of bonds called mortgage-backed securities, or MBS, and sold in pieces to investors, so that one loan may literally have a thousand owners.