According to Mortgage Bankers Association, over the past two years, 1 in 6 homes in the US have experienced mortgage distress as a result of the nation’s economic crisis, which was spurned by the housing market collapse. President Obama’s newly inaugurated administration made the housing crisis a priority and issued a loan modification program that compensated mortgage banks to modify delinquent mortgage loans. As a result many mortgage lenders have begun to modify delinquent home loans, thus preventing foreclosure and bolstering a saddened economy burdened by increased homelessness statistical reports. However, as the Wall Street Journal pointed out last week, many of these modified loans are rejected by the investors that hold these home loans in their investment bonds.

When mortgage loans are made, the company/bank that lends the money, pools the mortgage with other mortgage loans of similar terms, interest rates and risks. These pools are securitized (in short – packaged in a various dollar denominations and given an investment grade and interest rate) and sold on the bond market. US mortgage backed bonds are popular investment instruments and are purchased around the world by individuals and other countries’ governments as relatively safe investment…until two years ago.

So going back to mortgage loan modifications…when these investors get notice requesting permission to reduce a mortgage loan payment through a loan modification, the notice is essentially saying, would you, the investor, mind reducing your income from a bond and decreasing your investment portfolio substantially? The negative response by many of these bond holders/investors are causing many loan modifications to face rejection and a return to a foreclosure status after homeowners and loan servicers alike believe the loan is modified. Many housing finance experts think these investor actions will cause another flood of foreclosures over the next six months. Coincidently, if the homes go to foreclosure, the likelihood these investors will lose most of their investment is high. US Senator Durbin (D) has been arguing the defeat of the bankruptcy reform that allowed bankruptcy judges the ability to re-write mortgages of petitioners (someone filing bankruptcy) is the necessary teeth needed to motivate banks and investors to modify the very mortgage loans that caused the current economic depression.