Any homeowner who has tried to modify their mortgage loan knows that it is hard or impossible. Why is this. Is it because the banks are overwhelmed with requests and doing a modification is time consuming and complicated? Partially, but not completely.
From a banks perspective, for many reasons, loan mods are generally a financial loser. The fact that 70% of the homeowners will default on their mods is one big reason for a bank not to do any.
There exists, however, another reason- the banks are tired of getting sued by the owners of the promisory notes. Most of these mortgage companies, including Countrywide, packaged and sold their loans to investors who than became owners of the notes. In those cases, Countrywide no longer technically owns the notes, but handles or services them and also still profits from them. In many cases, the owners of the notes do not want the mortgage loans modified because they will lose money by a reduced monthly payment. So what happens when a bank succombs to the uprecedented public and governmental pressure to modify? In some cases, the investors sue them.
In the lawsuit called Greenwich v. Countrywide, Greenwich, the owner of the Countrywide mortgage loans (aka owners of the note or investors) sued Countrywide in a New York court, to force them to purchase “every mortgage wherein they agreed to reduce payments.” Countrywide modified the mortgage loans by reducing the monthly payments by an aggregate $8.4 billion. Greenwich was not happy about losing $8.4 billion of mortgage payments, and sued Countrywide and demanded Countrywide buy the mortgages back from Greenwich under a “you break it, you buy it theory”.
The outcome of these cases varies, often depending on whether or not the investors had a contract with the bank prohibiting them from modifying the loan without investor permission. The threat of suit is sufficient to deter banks from modifying the loans.
The way around this impediment to loan modificiations, was handled in one case by the government granting immunity to banks should they decide to modify. A law would be passed that prohibits investors from suing the banks for loan modifications. While the legality of such a law is suspect (since it smacks of excessive governmental intervention in private contracts), it works in other jurisdictions that are looking for ways to encourage loan modifications.