The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

How Foreclosures Equal Profits

Aug 17, 2009

Mortgage companies have modified loans for only 9% of homeowners eligible under the “Home Affordable Modification Program” announced by the Obama administration in February.

Why is that? Perhaps because the mortgage companies make so much money keeping mortgages in delinquency.

Mortgage companies typically collect as much as 6% in late fees when a monthly payment is late. Their subsidiaries are paid for services like title searches, insurance policies, appraisals, and other legal paperwork involved in delinquent loans. Besides, the mortgage companies no longer own the homes – they only service the mortgage. So if the value of the home drops during the delinquency period, it matters little to the mortgage company. It is simply interested in cashing in on fees as long as it can.

Such fees are so lucrative that one company, Ocwen Financial, reported that 12% of its income came from fees made on late mortgage payments in 2007.

It’s to the mortgage companies’ advantage to keep homes in delinquency as long as possible. As a result, from June 2008 to June 2009, the number of mortgages 90 days or more delinquent skyrocketed from 1.8 million to 3 million. On the other hand, the number of homes taken into ownership by banks went down during the same period from 333,000 to 245,000.

The government’s loan modification program makes for good public relations, but it cannot fix a rotten system that feeds off the misery of the population.