By John Clark
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.