Troubled homeowners, once hopeful after learning about the possibility of a loan modification as a possible way to avoid foreclosure, are now experiencing frustration as the process is delayed and fraught with confusing instructions and threatening possibilities.

These delays may or may not have anything to do with the qualification of the homeowner in any given situation, because, apparently, the problem lies much deeper. Those seeking financial relief through loan modification may find themselves out of time before the legal issues surrounding their loan modification are resolved.

So What Is the Problem?

The problem lies in the fact that loans that have been bundled and sold are not always owned by the banks that service them. More often, the mortgages are owned by a group of investors who could potentially sue the servicing banks, if the loans are modified.

There seems to be a difference of opinion about whether it is legal for a service provider to modify a loan it does not own. Michael Gross, executive with Bank of America, says that some securitization contracts expressly forbid any changes to the underlying mortgage. For that reason, he says that banks are more flexible in dealing with loans that they themselves hold than those they merely service. In fact, the stage has already been set by hedgefunds such as Greenwich Financial Services and Braddock Financial, who, as early as last October, intimated they might sue banks if changes were made.

However, American Securitization Forum executive, Thomas Deutsch, believes those contracts do allow for loan modification "in appropriate circumstances," even when held in mortgage-backed security pools.

How this will all play out is still uncertain, but in the meantime, lawmakers such as Barney Frank, Democrat from Massachusetts and Chairman of the House Financial Services Committee, declared that the feedback he is getting from loan servicers indicates that efforts made to modify loans are running into trouble, and that's not good news for homeowners whose situations require immediate attention or financial assistance.