Yes, Your Loan Has Been Modified, But...

...not in the way you might have wanted.

Here's Mike Konczal of Rortybomb describing something I can scarcely believe.

You'll recall that foreclosures in the country are up. That a staggering number of American homeowners are underwater in their loans. There's this idea that banks are being pressured/incentivized/begged to modify loans so that foreclosures are reduced. Banks keep getting paid, homeowners stay in their homes - this is something that is, arguably a good goal.

You'll also recall that attempts to make banks actually modify loans have been less than successful. Pres. Obama's target of millions of homeowwners has yet to affect even one hundred thousand.

But here's the kicker: Most of the loan modifications are actually increasing the total amount owed to the banks.

Here's Konczal:

I’ve seen a lot of bad things during this financial crisis, but this is the most disgusting thing I’ve seen so far. At a time when one out of four homeowners are underwater, banks are using a mortgage modification program to pile on more debt on these loans. They do this even when it’s well known the correlation between the level of being underwater and default.

How? From the report: “Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification.” So fees allow them to make it look like they are doing their clients a favor, while all they are really doing is running them in a big circle.

...

These are [homeowners] who, instead of walking away from their responsibilities, are burning time, money and energy to credible signal to the bank: “I’m in over my head with this mortgage but I want to do right by it because it’s an obligation I made to you. Instead of simply walking away or trying to short sell, is there any way we can work this out so I can still pay you whatever I can? I gave you my word and that means something to me.” And the bank uses their signal that they want to do the right thing to fuck these borrowers the hardest, piling on as much debt as possible on these guys as they can get away with. The borrowers are trying to come up from the pool to get a breath of air, and the bank grabs them by the head and pushes them as far underwater as they can get them. And we are subsidizing this.

(H/t Felix Salmon)