The NYT advances another theory why loan modifications aren't working. It's not because banks don't have the infrastructure in place (the banks' excuse) or because loan modifications en masse would kill their balance sheets (what many suspect), but rather that there's too much money to be made in the foreclosure process.

...many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

Not surprisingly, large mortgage companies, like Countrywide (now part of BofA) dispute the idea that they'd ever "jeopardize a customer relationship" in favor of collecting a hodgepodge of late fees and title fees and stuff like that.

But the argument sounds compelling enough such that it likely makes some difference in the economics of it all:

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

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