Why Mortgage Lenders and Servicers Frequently Foreclose in Colorado
April 25, 2011
By: David M. Serafin
Many homeowners in Denver and most areas of Colorado are upside down on their home mortgage. Even for homeowners with equity, a loan modification can provide much needed long term financial relief in the form of a reduced interest rate, lower principal payments or an extended loan duration. Yet, the overwhelming majority of my bankruptcy clients (many of who file exclusively to cure pre-petition mortgage arrears) end up woefully dissatisfied with the loan modification process, particularly when such denial leads to foreclosure.
I won’t reiterate the details of all of the parties involved in the foreclosure process but, to simplify, the three main parties are the investor (typically an institutional investor holding a securitized mortgage backed bond, the servicer (known as the lender) who collects mortgage payments and enforces non-compliance, and the homeowner.
The easy explanation is that the mortgage servicer earns more money by foreclosing than by granting loan modification requests. Think of a mortgage in terms of a zero sum game – a servicer loses money if you gain by being granted more favorable payment terms.
Conversely, the mortgage servicer earns money from the following sources: the monthly mortgage servicing fee (based upon a certain percentage of the mortgage loan balance), late fees and costs changed when the homeowner defaults on even one payment, and investment income from the securitized pool of mortgage loans it services.
The result of these perverse incentives for mortgage servicers to foreclose is that more homeowners are driven into chapter 13 bankruptcy in order to cure mortgage arrears incurred prior to bankruptcy. Chapter 13 bankruptcy allows a homeowner to pay back the arrears portion (plus reasonable costs and fees for the lender), along with payments to priority and unsecured creditors over 3 to 5 years, which prevents the mortgage servicer from being granted relief from stay to foreclose (e.g. asking the bankruptcy court for permission to foreclose). The regular monthly mortgage payment will still continue to be made directly to the mortgage servicer.
At the same time, in my Denver, Colorado based bankruptcy practice, I’ve had increasing numbers of mortgage servicers request relief from stay in order to foreclose – even while the bankruptcy debtor is curing pre-petition arrears in chapter 13 - because my client has allegedly defaulted on at least one post-petition mortgage payment. I believe that many servicers credit post bankruptcy petition mortgage payments to pre-petition arrears (even while the debtor is making full plan payments in a chapter 13 bankruptcy) and then attempt to justify eventual foreclosure based on this supposed ‘default.’
As a Denver foreclosure defense attorney, I always advise my chapter 13 bankruptcy clients to keep meticulous payment records for when we need to contest the mortgage servicer’s motion for relief from stay.