There has been a lot going on lately especially with the current outlook of mortgage rates falling. Another big thing that has been gaining steam has been mortgage loan modifications. I read a great article on why it is so difficult to modify a loan and it is probably the best one seen yet.
Most people are unaware of who has control of their mortgage. The fact is, there might be hundreds and it is hard for people to find the point of contact to renegotiate the loan. Mortgages are bought and sold in the secondary market, bundled up into packages and sold in the bond market to investors, the lender may not own a specific mortgage. So it is not just banks that have to take a loss, it is investors and many are unwilling to do so because of ladder that has to be climbed to get approval from each one.
Recent articles have said that up to 50% of loan modifications performed this year are re-defaulting. It seems that good money is being thrown after bad.
What is A Loan Modification
When different terms are negotiated with the lender or loan servicer on the mortgage to change the original terms of the contract.
Factors that influence a loan modification all depends on the loan servicer who is handling the modification. If you don’t contact the lender, they will never work with you. There is a huge chunk of borrowers who never contact the lender, it never ceases to amaze me. Can’t get anything done if contact hasn’t been made.
A loan modification can change one of a few things
- Reduction in the Interest Rate (Temporary or Long Term)
- Forgiveness on Principal
- Wrap payments on the backend of the loan.
You will need a hardship letter that spills everything, this is your chance so let the lender hear it. You will have to have missed up to three payments and not on purpose either, along with showing that you can make payments if you are lucky enough to get a modification at this point. Proof on income earned along with monthly budget reports will have to be submitted. Being responsive is one of the most important things that can be done when working on modifying the terms of the mortgage.
So who to contact
Be careful in the company you choose to work with first off if you need to do a loan modification. Never pay an upfront fee for work to be performed. Although these are trying times for many individuals or families, there are always people out there that are trying to make a buck off people’s situations.
The Minnesota Department of Commerce just had a press release warning consumers about using unlicensed mortgage originators or companies. Actually they advise you to contact the loan servicer first or contact the Minnesota Homeownership Center. Which is a non-profit organization that is free of charge that offers a network of providers in Minnesota.
Not Enough
Unfortunately not enough is being done and there is little legislation in affect. Lenders have to protect their investors profits and maybe, just maybe one of these bailouts that graces the television almost every day will focus on loan modifications that actually work. 
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The mods are working for those that fit the guidelines. Mods have always been available for folks with a temporary hardship so for them to work more widespread a hardship has to be defined in more detail and most people that want one do not qualify unless we see principal reduction because most are on option arms that were sold at the minimum payment and these borrowers overstated their income and cannot afford a fully amotized loan at some point in the future.
@James
That’s just it, hardly any fit the guidelines. You have people with debt to income ratios that are way to high, they don’t fit the normal qualifications. Borrowers that received unheard of low rate interest rates around 3% for a loan modification can’t even keep it going. What about the reponsibile people that have mortgages that they are paying, I am sure they would like that 3%. They are throwing good money after bad.
Until the government creates some sort of legislation for loan modifications with investors, the problem will run deeper. But understand investors have yields that they have to protect and I can completely see their unwillingness to modify theses loans.