Loan Modifications May Be Working: Here’s Why
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Mortgage lenders aren’t thrilled about loan modifications, but they may be working nonetheless. The key is affordability. Loan modifications that help homeowners better afford their payments result in better results than mortgages that don’t change anything at all. CNN Money reports on the latest government report showing that loan modifications may actually work:
Only 23% of borrowers had fallen behind in their payments within six months if their modifications lowered monthly payments by more than 10%, according to a quarterly mortgage report released Friday by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
This compares with 46% of borrowers whose payments rose by more than 10% and 51% whose payments were unchanged.
Why have some loan modifications shown high default rates?
Earlier, a report “proving” that loan modifications weren’t working circulated, claiming that 50% were delinquent within six months. However, the “loan modifications” cited in the report sometimes resulted in higher payments because the lenders added fees to the total. Additionally, mortgage lenders called extensions of teaser rates “loan modifications” when they weren’t really any such thing in the spirit of the process. These teaser rates were extended for a year or two, but nothing changed — except the economy got worse. So delinquencies increased when the extended teasers expired.
Real loan modifications seem to have a better track record
When loan modifications are made that either reduce the principal, extend the term out by 10 or 15 years, or result in a lower fixed rate, it tends to help out. And, really, everyone benefits from these arrangements. The homeowner gets an affordable payment and can keep the house, and the lender doesn’t have to go through the costly foreclosure process.
It is clear that affordability is the key. This means that there are some cases in which loan modifications may not work. If there is no way for a borrower to make anything approaching a reasonable payment, then loan modification isn’t going to be a viable option. But I have a feeling that in most cases, loan modification would be a good solution for all involved — if only the mortgage lenders would sign on.
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