One of the problems with the Administration's plans to use loan modification to prevent foreclosures is that the lending industry is set-up to be more profitable when loans fail. For instance,

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

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

While the Administration has to deal with the present reality in setting up an effective response to the current foreclosure crisis, the mechanics of this situation demand redress through regulatory reform. The whole idea is to create a set of incentives so that lenders are rewarded when loans perform, not when they fail.

-- Tim Fernholz

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