Welcome to Loan Modification Nation

There's gold in them thar loan modification hills, I tell ya. At least that's the way it felt at SourceMedia's recent servicing conference in Dallas. At times, it felt like an old fashioned regional brokers show, that is, the smell of money and opportunity was in the air.

During the two-day event I met many 'loan mod' and 'loss mit' specialists and their brethren. I also met firms that wanted to invest in delinquent loans, servicers that specialize in "high touch" products, and a new auction company called LoanMarket.net whose mission in life is to marry sellers of delinquent loans with buyers.

Yes, it smelled like opportunity. It felt like the old days when mortgage banking was a thriving industry. What was most interesting about the show was that it was supposed to be a "servicing" show but at every turn conversations eventually led to loan mods. (Loan mods are now a major part of servicing, I guess.)

Loan mods, it's believed, are a major opportunity for both the industry's survivors and new entrants looking to make a living. Or is it? Well, it should be, but let's first consider something important: 50% of all loan mods eventually go south. That's not a very good ratio, but then again, it also means that 50% may work. The trouble is finding out what the 50% that worked are doing right. Everything in time, I guess. During the show I picked up several interesting tidbits of information but two stuck in my brain. Here's the first one: a loan servicer based in Texas has a loan mod caseload of 4,000 loans but 1,700 of them include paying customers who are merely looking for a rate reduction. "They're clogging up the system," said a servicing executive who manages the effort. "They don't really need help."

In other words, current mortgagors want a break on their loan. I guess the loan modification field of opportunity applies to all consumers -- the "good guys" as well as the deadbeats. Stop me if you've heard this one: "I've been paying my mortgage for 10 years and have been current. The guy across the street who got his loan three years ago and who has the same house, just went broke and got a loan mod. Why can't I have one too? I've been paying my loan all these years. What do I get out of this bailout?"

And here's the other interesting tidbit: the nation's top five servicers -- all of which are banks or have bank affiliates -- have the ear of the Treasury Department and jammed through the system the $1,000 loan mod incentive fee for servicers. These same top five firms get that $1,000 for each loan mod -- even if eventually the loan goes bad.

Why would the top five want a $1,000 incentive fee? Answer: Well, because if they get $1,000 for each loan they modify and they decide to modify 10% of their servicing portfolio (a reasonable number) they then can earn fee income of $2 billion.

Actually, that figure is wrong. According to this newspaper's own Quarterly Data Report, the top five, as a group, service 45.3 million in loans. Ten-percent of that is 4.5 million. Multiply that by $1,000 and it's $4.5 billion in fee income -- even if the loan mods don't work. As Neil Young once sang, "In the field of opportunity, it's plowing time again."

Paul Muolo is executive editor of National Mortgage News. He can be emailed at: Paul.Muolo@SourceMedia.com.