When you consider the effects of a loan modification, it looks like a win-win-win situation. The homeowner benefits because with a loan modification, they are able to make their lowered monthly mortgage payments and keep their home, the lenders save the huge cost of repossessing and reselling a foreclosed property, and neighborhoods avoid the negative effects on real estate values in the community. This is the reason why the Bush administration launched an effort to encourage loan modifications, and the reason why the Obama administration greatly expanded on it. However, we are still faced with the fact that of the initially estimated 4 million households that would benefit from Obama’s loan modification initiative, only 350,000 borrowers have even been offered new loans. On the other hand, 1,155,299 properties faced new foreclosure filings between March and June.

Why are lenders not offering more modifications? Why have so few modifications gone into effect?

There are two reasons lenders may be reluctant to modify a loan:

1) A Minority of Homeowners Just Need Time – Not Help
Approximately 30% of troubled debtors eventually can pay off a mortgage without a modification. Therefore, for lenders, 30% of the total cost of modifying loans is wasted. Since lenders don’t know beforehand if a particular homeowner falls into the percentage who will eventually make it out without a modification, they are more reluctant to grant modifications overall.

2) A Loan Modification May Not Be a Permanent Solution
The second problem is the risk that many borrowers redefault on a modified loan. By the time that happens, the value of the house has declined further, and foreclosure costs the lender even more than it would have earlier. The HAMP program includes $10 billion for partial protection against that risk, but it may not be enough, especially given the sour outlook for employment.
If you are looking for a loan modification, you need to be serious about committing to change. Do not view loan modifications as an “easy way out” or a temporary relief. A successful loan modification with lasting effects will require you to take charge of your finances and be diligent about making your payments. A loan modification should not be the beginning of another cycle. It should be the beginning of a new path.

Tags: debt, foreclosure, homeowners, Loan modification, mortgage, mortgage modification

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