Mortgage Modifications and Chapter 13
Bankruptcy
Although your mortgage lender may hate the thought of it, there are indications that mortgage modifications may be a success.
Some mortgage modifications can help homeowners afford their
loan payments and avoid foreclosure. However, many mortgage companies are still resistant to making
modifications. Industry lobbyists say
they do little to help, as a large number of mortgages that are modified end up
in default again relatively quickly. And
they are right - mortgage modifications that stop short of making the mortgage
payments affordable for the homeowner do little to stop
foreclosure. For mortgage
modifications to be successful, they must actually help the borrower.
According to the most recent quarterly mortgage report by
the Office of the Comptroller of the Currency and the Office of Thrift
Supervision, only 23 percent of homeowners with loan modifications fell behind
on mortgage payments within six months if the modifications lowered their
payments by more than 10 percent.
Fifty-one percent of homeowners who had their loans
modified, but did not receive a lower payment, were in default on their loans
within six months. Forty-six percent of
those unlucky enough to have their mortgage payments increase more than 10
percent defaulted within six months of the mortgage modification.
How do mortgage modifications cause payments to
increase? It seems to defeat the
purpose, but it happens. Some lenders agree to loan modifications, but then tack on fees and use
teaser rates to close the deal. Just
like adjustable rate mortgages, when the teaser rates expire, the homeowners can be in trouble.
Lenders who really come to the table prepared to help
homeowners create the most successful loan modifications. If the principal on the loan is reduced and
the terms extended to give the homeowner breathing room, a reduction of the
monthly payments is possible. By
reducing the monthly payments, the homeowner is generally better able to manage
them and the lender can avoid the expense of foreclosure.
More lenders may soon be willing to play ball with mortgage
loan modifications. If the cram down
legislation - which would allow judges to modify the terms of distressed mortgages on primary residences in bankruptcy cases - is passed, bankruptcy judges will have the authority to bypass the
lenders and make modifications to mortgage loans.
Mortgage lenders are fighting this
legislation as hard as they can, but ultimately, if it is passed, they know
they will need to offer homeowners better modification deals in order to remain
in control. If the law is passed,
homeowners who file Chapter 13
bankruptcy may gain the upper hand and be able to fight foreclosure more
effectively.
If Chapter 13 bankruptcy isn't for you, get more information about Chapter 7 bankruptcy and how it works.