Thursday, July 30
Written 9:50 a.m. EDT
NIXING THE CURE: I return from a week's vacation with the top story on the site today: my article describing how lenders avoid the surest method of preventing foreclosures.
Studies have shown that the most effective way to prevent a foreclosure is to forgive some of the mortgage debt. But just 1 in 50 mortgage modifications include debt forgiveness. If you get a mortgage modification, you are 39 times more likely to have debt added to your loan than to have debt forgiven.
It's counterintuitive to slather even more debt onto troubled borrowers, but that's what lenders do. They're in business to make money, not to make sense. And in the past few years they've shown that their money-making acumen hasn't been especially sharp, except when they plead for government bailouts. They're pretty good at that. Lenders also are adept at accepting government money while complaining about government interference.
In the article, I note that there are other issues to consider: Is it fair to forgive the debt of feckless borrowers? How does a servicer figure out whether the optimal financial outcome is foreclosure or modification? But when we focus strictly on what works and what doesn't, it's clear that the most effective way to prevent foreclosure is to forgive enough debt that the homeowner is no longer upside-down on the mortgage.
THE FEE ANGLE: Why aren't mortgage servicers more aggressive when it comes to helping delinquent borrowers? Because they collect lucrative fees as long as borrowers are delinquent, The New York Times' Peter S. Goodman reports.
It's a compelling article, although I think Goodman got something wrong. He writes that mortgage servicers "typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments." It's my understanding that servicers extract their fees from payments received. If it doesn't receive a payment, the servicer doesn't get its fee -- but it still has to pass along the interest due to the investor.
Eventually, when the loan becomes current or the house is sold in foreclosure, the servicer is repaid the past-due fees and the interest is advanced to the investor. But that process can take a year or more.
NEW REG IN EFFECT: New mortgage-lending rules go into effect today. The regulations under the Truth in Lending Act were revised a year ago, so lenders have had 12 months to implement the changes.
Starting today, there are stricter disclosure requirements on mortgages and home equity loans. In addition, there are newly mandated waiting periods when there is a material change to the loan that you applied for.
The rule says that the lender must give you a good faith estimate of closing costs within three days of applying for a mortgage. On top of that, you have to get the disclosure documents at least seven days before closing. And that's not all. If there is a change to the loan, such as an updated interest rate, you have to get a disclosure of that change at least three days before closing.
There are headachy rules defining what a business day is, and requiring how long a document has to be in the mail before you're assumed to have received it. For you, I think the bottom line is that you should expect to lock your mortgage rate at least three days before closing, or you could be at risk of having the closing date moved back.