Mortgage Companies Afraid to Modify Mortgages Because of Securitization Mess

This article from the New York Times has an interesting quote:

So far, many companies have been reluctant to aggressively reduce payments because they are afraid that borrowers might default again or that investors in mortgage securities might file suit.

Almost all of the mortgages out there have been securitized. Click here for a colloquial explanation of mortgage-backed securities. This means that the mortgages have been pooled and sold to a trust, and shares of the trust have been sold to investors. The trusts hire servicers to interact with the borrowers. Those servicers are bound by a pooling and servicing agreement, which usually provides a maximum amount of mortgages that can be modified in any particular trust. Usually, the number is around 5%. Default numbers for many of these trusts are climbing over 30% now, so there are a lot more than 5% of the mortgages that need to be modified.

However, the lenders are afraid to modify, because they might get sued by the investors. So, they are sitting pat, doing nothing, while millions of homeowners are losing homes that could have been saved with a reasonable loan modification. This is another great reason to allow modification of mortgages in Chapter 13 bankruptcy. This would remove the whole servicer/investor dynamic and would rely entirely on the value of the house. The investor couldn’t sue the servicer, because it was the bankruptcy court that modified the mortgage