Overview
Loan modification is not a new practice, however it is more common now due to the mortgage crisis, declining home values and the economic recession. When property values are remaining consistent or are rising, your ability to get a loan modification tends to be very difficult. When a home facing foreclosure has equity, the bank takes a minimal loss or no loss at all. With nothing to gain the bank has no interest in approving a homeowner for loan modification with a track record of financial difficulties. The lender can place the property in foreclosure, find a new homeowner who can make the payments on time and remain profitable. Banks do not want to engage in loan modifications or deal with a risky borrower in a stable economy.

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Declining property values combined with tougher lender guidelines and adjusting interest rates have resulted in the loan modification boom. No one is going to buy a home for 15%-30% above market value and no lender is going to refinance that property. Your mortgage, or mortgage-backed security, is the collateral for the note that a bank lends a borrower.

In the current economy, equity in homes has dwindled and, in many cases, has become negative. In lieu of foreclosure, banks would rather reduce the borrower’s mortgage payments and/or balance. Neither banks nor borrowers have power in these difficult times. In fact, banks and borrowers must work together to avoid foreclosure to not only keep families in their homes but also turn this recession around. Loan modification might mean immediate financial losses for our banking institutions, but the long-term mortgage payment losses are minimized versus mass foreclosures.

Millions of Americans have taken out high home equity loans against their mortgages in markets that were at the time appreciating but now have rapidly depreciated. Then, when the homeowner’s adjustable-rate mortgage (ARM) changes and the payment can no longer be made a bank will try to refinance the mortgage, only to discover there is little chance. Most homeowners believe their only option is foreclosure. Since they cannot make the payments, sell, or refinance, are there other options other than foreclosure? The first options that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.

With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to revisit their loan modification strategy. In today’s economy, banks are willing to engage in loan modification to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.