Record numbers of homeowners are trying to avoid foreclosure. One of the options available to such homeowners is loan modification. A loan modification is a permanent change in one or more of the terms of the loan allowing the loan to be reinstated and resulting in a payment the homeowner can afford.
For a loan modification to be effective, it must reduce a loan’s interest rate or balance or extend its term. Common loan modifications include:
1. Adding missed payments to the existing loan balance
2. Making an adjustable-rate mortgage into a fixed-rate mortgage
3. Extending the number of years you have to repay
The nation’s 27 biggest lenders have formed an alliance called Hope Now to help homeowners facing foreclosure. The biggest mistake here is that society is relying on the lenders to fix the problem – the very problem created by their reckless lending. Very little is known about the success rate of such loan modifications. Very little data is available about its effectiveness.
The loan modification process is simple, fast, and easy and saves the homeowner a significant amount of money compared to the time and costs involved with a traditional mortgage refinancing. At least that is what it is supposed to be. The reality is very different. Many homeowners have found that the modifications they received are unaffordable. The new monthly payments end up only slightly lower than the original monthly payments. According to a report by the State Foreclosure Prevention Working Group, about 32,000 loans which were recently modified are delinquent again.
Majority of the loan modification programs offer temporary and modest reduction in the interest rate accompanied by an increase in the overall principal. The increase is due to fees larded onto the loan. The homeowner has no option but to agree to these fees or risk losing his home. According to the California Department of Corporations, of the total 21,359 loan modifications between January and May this year, only 356 – a mere 1.3% – involved a reduction in the principle balance. The lucky few who did get a loan modification may be imperiled by the new terms. The homeowner desperate to keep his home cannot question the terms of the loan modification.
With foreclosures on the rise, the lenders are now inundated with calls from homeowners who cannot afford the monthly payments. The fact remains that the lenders are not geared to provide this service. Their service staffs were trained only to collect the checks at the end of every month. Most homeowners get no help in renegotiating their mortgages. The Working Group’s report reveals that about 70% of delinquent homeowners did not receive any help in renegotiating their mortgage.
There are no regulations governing loan modification process, nor is it supervised by the courts. The process varies from lender to lender. There is no standard process. It is high time that the government wake up and pass some laws to regulate loan modifications.
[...] Anthony Luafalealo from Amateur Economists thinks loan modifications just add salt to the wound. [...]
Fee based loan modification companies are popping up claiming success rates of 95%. Having worked with loss mitigation departments attempting to negotiate short-sales both on the buyer and seller side, I find that figure hard to believe. The loss mitigation departments I have dealt with have been unresponsive, inflexible, disorganized, and apathetic. Perhaps it is because senior management within these companies has another exit strategy for their non-preforming loans: dump them on Joe Taxpayer.