Loan Modifications: The Good And The Bad


Loan Modifications: The Good And The Bad

Francesca Levy, 03.25.10, 04:20 PM EDT

Just because you can restructure your mortgage doesn’t mean you should.


Foreclosures and problem loans have thrown millions of American households into crisis. Over 7.5 million mortgages are delinquent, and an estimated 1 million have been taken back by the banks, according to Lender Processing Services, a Jacksonville-Fla.- based mortgage-industry service provider.

In response, the government founded the Making Home Affordable program, with $75 billion in federal funds, to offer services–including loan modification–to certain homeowners. But navigating the thicket of paperwork and separating good from bad advice can prove downright daunting. And for some struggling homeowners loan modification may not even be the right option.

As of February the Home Affordable Modification Program had modified the loans of over 1 million homeowners, either on a trial or permanent basis, according to the U.S. Department of the Treasury and the Department of Housing and Urban Development. But some argue that the government’s attempts at modifying loans has been unsuccessful, noting that the Treasury Department estimates that the program may reach only half of the 4 million struggling borrowers it was intended to help.

Still, loan modification can be the right choice if it makes monthly payments more realistic after a cold, hard look at one’s finances. Yet not all modifications are created equal, and borrowers can take a few steps to ensure that they’ve sought help from someone with their interests in mind.

Modification’s Different Meanings

“Loan modification” is a broad label for any change to the original terms of a mortgage; but it typically involves altering a loan’s interest rate or extending the loan period. Lenders will often consent to this process because it’s cheaper than the cost of a homeowner defaulting.

The trouble is that not all loan modifications have a happy ending. More than half the time, according to LPS, when delinquent loans are restructured, borrowers end up in foreclosure a year later anyway. Delaying foreclosures that are all but inevitable doesn’t just harm individual families – it can drag the housing recession out longer.

“Unless property values skyrocket by 20 to 30% in the short term, these distressed properties will ultimately go to foreclosure. The problem is just snowballing,” says Ted Jadlos, senior managing director of the Applied Analytics group at LPS. “We’re talking about the housing hangover lasting until 2011.”

Many loan modifications fail because they don’t fix the borrower’s immediate problem–unaffordable monthly payments. In fact, a restructured loan could end up costing more per month than what the mortgage-holder was originally paying–in some cases, twice as much, says Marietta Rodriguez, director for homeownership and lending for NeighborWorks America, a nonprofit that Congress created to promote home-ownership among low-to-moderate-income Americans.

For one, lenders might need to bring back taxes and insurance current to avoid tax foreclosure, or add months of unpaid payments to the cost of the loan. In these cases, says Rodriguez, borrowers should take stock of whether a loan modification is worth it. For some homeowners in distress, foreclosure is a better option than loan modification. But before homeowners attempt to make a decision, she says they ought to seek out the help of an HUD-approved mortgage counselor.

“People don’t know that there’s reliable, reputable, advice available so they go it on their own,” says Rodriguez. “They may not have understood their loan product to begin with, much less try to restructure it now.”

Get Professional Help
A preliminary report by the Urban Institute, a policy think tank, showed that borrowers who sought counseling through the National Foreclosure Mitigation Counseling Program, administered by NeighborWorks, were able to reduce their payments by $454 more per month than if they hadn’t used a counselor, and were more likely to avoid foreclosure–or, if the foreclosure process had already begun, to stop it.

But as unpleasant an ordeal as it is, “foreclosure” isn’t necessarily a dirty word. Both for individuals and the housing market at large, it’s not always a bad thing to allow a foreclosure to proceed–and sometimes doing so sooner, rather than staving off the outcome temporarily, is the right choice.

“Foreclosures are a symptom; the cause is borrower distress,” says Jadlos. “We’re going to have to let some burn occur–let the foreclosure process get started. Let banks manage portfolios of problem assets so they don’t flood the market. You don’t have to throw people out on the street. You can find some metric to turn some of these homes into rental units.”

SOURCE: FORBES In Depth: Loan Modifications: The Good And The Bad