We’ve previously warned consumers to avoid foreclosure rescue scams and seek help from legitimate sources instead.

But now there’s new evidence that even alternatives promoted by the federal government, such as the Home Affordable Modification Program, aren’t providing the help struggling homeowners need because many large banks and other companies that service mortgages find it’s better for their own bottom line to foreclose rather than offer loan modifications that would benefit both homeowners and the economy overall.

After homeowners sign all of those stacks of paper at closing on a new home, the original lender or investment group that purchases the mortgage on the secondary market typically hires another bank or financial company to serve as the mortgage servicer, which then collects monthly payments and administers the loan.   The problem is that unlike homeowners or the investors backing the mortgages, these mortgage servicers don’t risk losing money on foreclosures, and the system actually has built-in incentives that allow them to profit when consumers lose their homes, according to a just-released report from the National Consumer Law Center. 

“Foreclosures are a costly ordeal for the homeowner, the lender and the community.  Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes,” says Diane Thompson, an NCLC attorney who is the author of the report.  As a result, Americans who might be able to stay in their homes under a modification plan are unnecessarily being moved right past that option and on to foreclosure.  

The report charges that Congress, the Obama Administration, the Securities and Exchange Commission--as well as credit rating agencies and bond insurers who set the terms in the mortgage market--have all failed to provide mortgage servicers with the necessary incentives to reduce foreclosures and increase loan modifications. “What is lacking in the system is not a carrot; what is lacking is a stick. Servicers must be required to make modifications where appropriate and the penalties for failing to do so must be certain and substantial,” the report concludes. In addition to documenting how the system is failing, the report offers recommendations on specific steps that could be taken to correct the problem.–Andrea Rock