Do Mortgage Modifications Work?

August 13, 2009 No Comments »

mortgage modifications

Here’s some timely mortgage Q&A: “Do mortgage modifications work?”

Since the mortgage mess got in full swing, lenders and loan servicers have been increasingly offering mortgage modifications to stave off foreclosure, but the results haven’t been too hot.

In fact, the re-default rate on loan modifications has been so high that many question if they even work, and if they’re worth all the legwork/trouble.

Back in May, Fitch Ratings warned that 3 out of 4 mortgage modifications may re-default after just 12 months, putting into question their value as loss mitigation tools.

Of course, there may be a reason all these loan modifications are turning out nasty numbers; they don’t actually lower monthly mortgage payments.

That’s right, many of these loan modifications actually result in payments that are unchanged or higher than they were before, thanks to past due amounts being piled on top of the existing balance.

These types of loan modifications, if you can even call them that, are really just simple repayment plans that get borrowers current but fail to address affordability concerns.

Clearly that’s no way to help a struggling homeowner get back on track, unless by chance they had a brief loss of income that has since been restored.

So what’s the answer?  How do we make more mortgage modifications work?

Well, it’s not as hard as it may seem; apparently a combination of lower monthly payments, along with principal forbearance or forgiveness will get the ball rolling and make for more sustainable payments moving forward.

After all, if a homeowner can’t make their $2,000 a month housing payment, why would we expect them to make a $2,500 payment?

Taking the time to determine what borrowers can actually afford via income documentation and other underwriting measures will likely lead to a better success rate.

Unfortunately, more stringent underwriting will probably also reveal that foreclosure is simply the only answer for many.

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