08/06/2009 05:12 am ET | Updated May 25, 2011

Mortgage Modifications Still Uncommon Despite Huge Losses From Liquidation Sales

Despite efforts by the Obama Administration to stave off foreclosures by providing incentives for banks to modify mortgages for distressed homeowners, the Office of the Comptroller of Currency reported that foreclosures in progress rose 22 percent in the first quarter and was 73 percent higher than during the first quarter last year.

Foreclosures are up, in part, because convincing a bank to adjust the interest or principle on a mortgage has been a herculean task for the government and homeowners alike. In our Dispatches from the Displaced feature, we have heard from many homeowners who spent endless hours on the phone over many months to work out a financially viable mortgage with their bank. Some were successful, many have not been and others have fallen victim to mortgage scams out of desperation.

These families' primary complaint has been the dearth of information regarding how likely they are to receive a modification. They want to know if they should sell their house now and possibly go into bankruptcy, or hold out for a modification. Not having the information to make this decision has been torturous for struggling homeowners.

VeeAlva Adams, from New Mexico, wrote in to tell us that while she was led to expect a rapid response to her loan mod application, her bank continued to delay their response:

Wells Fargo said that I would be notified in 30 days about whether or not I qualified for help with [loan] restructuring. I contacted them every week to see if there was progress. After 30 days, they said it could be as much as 60 days. After 60 days, they said it could be as much as 90 days and now, long story short, as of last week they said they might not have an answer for me "indefinitely."

Mrs. Adams doesn't know whether or not to keep waiting. This weekend, the New York Times spoke with Alan M. White, an assistant professor at the Valparaiso University law school in Indiana who analyzed data on 3.5 million mortgages held by some of the nation's largest loan services companies, such as Bank of America, Chase Home Finance, Litton Loan Servicing, and Wells Fargo -- the company responsible for putting these mortgages into large securitization pools.

Mr. White found that modifications were rare, and mods that actually reduced a homeowner's principal were even rarer, despite the fact that banks lose far more from selling foreclosed houses than they do from reducing principal on mortgages.

In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance[...]

Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans -- just 17.2 percent of the total modified -- involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. "There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications," Mr. White said. "That is not rational economic behavior."

According to Mr. White, banks are hesitant to provide substantive modifications to struggling homeowners, even when refusing to lower interest rates could mean losing considerably more by selling the house in this barren market.

There is no precedent for widespread mortgage modifications, so banks need to guess at how modifying mortgages will affect their bottom line. The Huffington Post wants to hear from the decision makers in this process, those who choose between offering a modification and letting a family fall into foreclosure. If you are one of these people, please tell us your story by emailing us here.