There is a lot of talk these days about mortgage loan modifications. The Treasuryand the FDIC are both strong proponents of widespread loan modifications.
Lenders do NOT want to take back anyone's home if they can avoid it. They have already taken back so many they are having a hard time dealing with the disposition of those homes already. Distressed sales of REO properties are a major anchor that is pulling home values relentlessly lower which puts more homeowners in a negative equity position and increase the risk of even more defaults and foreclosures.
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When a homeowner cannot make the payments on their mortgage there are only three possible outcomes:
1) The property goes back to the lender through foreclosure or deed-in-lieu and the property goes back on the market
2) The homeowner sells the home in a conventional sale or a short sale and the home goes back on the market
3) The lender modifies the loan so the homeowner can make the payments and the home does not go back on the market
Loan modifications are BY FAR the best solution for the lender, the homeowner, and the country in situations were they can work.
So What Is A Loan Modification?
A loan modification is a mutual agreement by the lender and the borrower change in the terms of the loan. In the residential mortgage industry they are being done on a large scale to allow homeowners to restructure the financing in order to avoid losing their homes.
A true loan modification is a permanent solution that serves the best interests of the investor who owns the loan as well as the homeowner. They result in a reduction of the mortgage payment to a level that the homeowner can afford on an ongoing basis, and that will allow the homeowner to stay in their home. This is different from a repayment plan or forebearance which are typically short term solutions used to resolve temporary problems.
Loan modifications do NOT require appraisals, credit reports, or title reports because they are simply renegotiations of the terms on an existing Note... they are NOT a refinance.
A loan modification can consist of a reduction in the interest rate, a change from fully amortized to Interest Only payments for 5 to 7 years, an extension of the loan term, a reduction of the principal balance of the loan (this is rare), and a resolution of any arrearages (usually by adding them to the loan balance).
There are 6 specific reasons why Loan Modifications are BY FAR the best solution to the current foreclosure crisis...
1. Loan Modifications keep families in their homes
2. Loan Modifications ease the financial pressure that tears families apart
3. Loan Modifications are the least cost solution to the lenders... that's why they are doing so many of them.
4. Loan Modifications keep the house off the market and therefore each loan modification represents a step closer to the solution to the current crisis.
5. Loan Modifications are a market solution... they don't cost the taxpayers a dime
6. Loan Modifications can be done quickly
Who Qualifies for a Loan Modification?
Three conditions must usually be present for a loan modification to be viable: There has been a HARDSHIP that has resulted in the inability of the homeowner to make the current mortgage payment or the increased payment that will result from an adjustment in the interest rate. When assessing whether or not a hardship exists, look for something that has changed that has caused income to go down or expenses to go up such that the homeowner no longer has the income to make the current or soon-to-be current payment.
The second condition that must usually be present is that there is not enough equity remaining to sell the home and payoff the mortgage without the lender agreeing to take less than is owed.
Thirdly, and most importantly, the homeowner must be able to provide documentation showing that they can afford to make the proposed modified payment. Because this is NOT a refinance, but rather a negotiation between the homeowner (or their representative) and the lender, there are no published guidelines. All income can be considered as long as it can be documented. Common sense prevails in evaluating proposed loan modifications... remember, the lender does NOT want to take back the home.
For homeowners who can no longer make their current mortgage payment but who CAN make a lower payment, a loan modification can save their home. For lenders with non-performing loans, loan modifications can be the fastest and least cost solution to working out that loan. And for the rest of us, each loan that is modified is one more house that is not added back into the inventory overhand, and therefore it puts us one house closer to the end of this crisis.
©Doug C Jones Sept 20 2008 . Permission is hereby granted to repint this article provided the resource box and active links are included.
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