Comment: What Prevents Loan Modifications?

20 Pages Posted: 10 Jan 2008

See all articles by Kurt Eggert

Kurt Eggert

Chapman University, The Dale E. Fowler School of Law

Abstract

This comment describes the barriers to preventive servicing for securitized residential loans and assesses the importance of loan modifications, given the recent increases in default and foreclosure rates for subprime loans. Several hurdles slow or reduce such modifications, even those that help borrowers and investors alike. For example, self-interest may reduce servicers' willingness to modify loans rapidly.

In addition, underlying securitization agreements may impede servicers' ability and discretion in this area. Further, tax laws that govern a common securitization entity may limit modifications, as may accounting standards. Finally, "tranche warfare," the sometimes contradictory fiduciary duties servicers have toward investors holding different tranches of securitized pools, may decrease their ability or their willingness to modify loans.

This comment concludes that barriers to effective loan modifications should be reduced or eliminated where feasible, but that the securitization of subprime loans creates risks for borrowers.

Keywords: Mortgage servicing, Securitization, Subprime Lending, Predatory Lending

JEL Classification: G21

Suggested Citation

Eggert, Kurt, Comment: What Prevents Loan Modifications?. Housing Policy Debate, Vol. 18, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1081479

Kurt Eggert (Contact Author)

Chapman University, The Dale E. Fowler School of Law ( email )

One University Drive
Orange, CA 92866-1099
United States

HOME PAGE: http://www.chapman.edu/law/faculty/eggert.asp

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