The Other Reason You Didn’t Get Approved for a Loan Mod: the Pooling and Service Agreement

Have you attempted to get a loan modification under the government’s Home Affordable Modification Program (“HAMP”) but been turned down? I’m not surprised.

Despite more loan modifications being offered to homeowners overall, less than ten percent of the homeowners who qualify for a modification are actually being offered one.

Apparently lenders don’t have a legal duty to modify loans under the program, as evidenced by this recent blog post about a lawsuit filed by a homeowner. The homeowner’s attorney argued that her client qualified for a loan modification under the program, but the lender refused to grant it.

The homeowner lost, despite the lender’s attorney’s lackluster performance in the courtroom, despite a Net Present Value calculation in the homeowner’s favor, because the Supreme Court Judge found that the banks do not have an obligation to modify the loan under the HAMP program.

Despite qualifying, there is likely another reason why the homeowner didn’t qualify: the pooling and service agreements (“PSA”) between the investor on their loan and the servicer.  Each mortgage pool has a limit to the number of loans it can modify under the PSA, and too many people probably defaulted before you did.

In many cases, the PSA’s between the servicer and investor only allow modifications of a certain percentage of loans. The PSA governs the terms of how mortgages are pooled, securitized, sold to investors and then serviced, and many of these agreements contain provisions that do not allow servicers to modify loans for homeowners. Those that do typically only allow for less than 10% of the mortgages in a pool to be modified.

If the servicer modified too many loans, it would be in breach of the PSA, and opening itself up to lawsuits by the investors in the mortgage pool, and servicers have been hesitant to take that risk, regardless of the government’s loan modification programs.

If you’ve been turned down for a loan modification because your investor isn’t participating, here’s what I suggest you do: 

First, send the servicer (the company you send your mortgage payments to) a Qualified Written Request (“QWR”) that includes a request for the Pooling and Service Agreement between the servicer and the investor. The servicer might not produce it, but it’s worth a shot anyway for the wealth of other information you’ll receive from the servicer.

The servicer will probably tell you that you’re not entitled to receive a copy of the PSA because it’s “not relevant” (which is ridiculous – of course it’s relevant!) 

I have seen servicers produce a copy of it, so a QWR is a good first step.

The lender may tell you in its response to your QWR who owns the Note to your property, and if it’s a mortgage pool traded publicly on the stock exchange, there is another way to obtain the PSA. Visit the Securities and Exchange Commission’s website and run a search in the EDGAR database, and you’ll find the PSA there.

Publicly traded companies are required to routinely file reporting documents, of which the PSA is usually one of them. If you are savvy at reading contracts, you can review it to determine how the servicer is required to handle loss mitigation and loan modifications.

If the servicer tells you that your investor isn’t participating, you can ask why. If they tell you that they’ve reached the limit of mortgage modifications, ask if they can remove your mortgage from the pool. The PSA will discuss how that might be done — it should contain provisions for how the servicer is supposed to handle loss mitigation and how the mortgage security is structured.

This is why government backed mortgages have been eligible for mortgage modifications while other investors/lenders have not been as keen to offer them. The government isn’t going to sue itself, but an investor might sue a servicer for breach of the PSA between the two parties.