Saturday, February 21, 2009

Why Loan Modifications Don’t Happen: The Kubler-Ross Model Effect

It takes two to modify a loan; the borrower, and the servicer. The presumption is the servicer is the obstacle; why wouldn’t a borrower want a modification? The reality, however, is that often borrowers default and make no effort to reach an agreement, or they start negotiations for a modification but don’t pursue them. Why does this occur?

I think part of the answer is explained by the Kubler-Ross model. When someone loses something significant, the person goes through five stages to come to grips with the loss:

1. Denial - “This house is still a good investment!”

2. Anger - “How could this have happened?!”

3. Bargaining - “With a little help I can make this work.”

4. Depression - “This is going to wipe me out.”

5. Acceptance - “I’m moving on.”

Stage 3 is the stage at which a modification might happen – the rest of the time, a borrower’s mental state is not conducive to reaching an agreement. What are the odds of a borrower at that stage of the process connecting with someone at the servicer and working something out? Pretty small.