Why you may be better off filing for bankruptcy than getting a loan modification

Hoping to modify your mortgage this year? The last thing this blog is about is killing hope, but good luck with that.

Why are mortgage modifications so hard to get, in Massachusetts and elsewhere? Because your mortgage servicer really doesn’t want you to succeed!

Amazing, but true. And that proposition now has some academic backing, as Diane Thompson has published an article about it called “Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications” in the University of Washington Law Review.

Thompson explains how the best possible result for a mortgage servicer (besides collecting all the payments on time), is to have the debtor refinance the loan and pay it off.

When that is not feasible, however, the next best result for them is NOT to give you any sort of a break through loan modification. It’s to have the property go to foreclosure.

As she explains, “a foreclosure is the next best option. The servicer’s expenses, other than the costs of financing advances, will be paid first out of the proceeds of a foreclosure. Thus, the servicer will recover all sunk expenditures upon completion of the foreclosure. The servicer’s costs of financing those advances will not be recovered—but all other costs, including those services provided by affiliated entities, like title and property inspection, will be recovered.”

Because of this dynamic, if you are putting off a bankruptcy case while you wait on news of a hoped-for modification approval, you may be wasting your time. It is likely that you send in loads of documents, spend a lot of time on hold, and get the big rubber “NO” stamped on your file in a few months anyway.

It’s simply not in the servicing company’s interest to say “yes.”

With a bankrutpcy case, however, you, the debtor make the call on whether to proceed. You control the timing. And you can still try to negotiate a modification after the case is finished, and sometimes even while its going on.

If you have a mortgage problem anywhere in the Merrimack Valley and are interested in a possible bankruptcy solution, you can give me a call at 978-975-2608, and schedule a free no-obligation discussion of your options.


By Doug Beaton

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