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Loan Modification | Mortgage Modification

Thousands of borrowers at risk of losing their homes are turning to mortgage modifications as a way to avoid foreclosure. Both Freddie and Fannie Mae will hold off foreclosing on any more homes until 2009. In the meantime, lenders have agreed to help borrowers who are having trouble making their mortgage payments by modifying the terms of their existing mortgages. Some of the ways they’re helping borrowers include lowering interest rates, lengthening loan terms, and deferring principal. All of these modifications have two goals: lowering monthly payments and helping homeowners remain in their homes. If successful, these actions could give a much needed lift to the housing market.

Of the number of loans expected to go into foreclosure by 2011, only about a third or roughly 2-million, will be saved by government programs. If unemployment continues to rise and exceeds 9%, that number will be even less.
Perhaps you don’t realize this, but some mortgages should be allowed to fail. This sounds harsh, but some borrowers should never have been approved to begin with. Foreclosure acts to rid the market of bad loans such as those given to people taking a gamble on real estate, people that purchased vacation homes and third homes, and dubious homeowners. These borrowers probably won’t be helped out of their situations.

A different perspective on mortgage modifications

Even if all 2 million of those foreclosures could be stopped, the default rate will still be much higher, up to four times higher, than it was at the beginning of 2000. And as long as mortgage defaults continue to set new records, home sales will remain unpredictable.

Brokers can offer some relief. They’ll likely be able to modify mortgages that their books show they own. But because of a lack of authority, they likely won’t be able to modify many of those that have been sold to investors in mortgage backed securities.
BBG Federal Savings Bank is one example. Two hundred and thirty-five million dollars was set aside by BBG’s insurers’ unit to help troubled borrowers. This money was part of an agreement BBG reached in 2008 with the Office of Thrift Supervision, its regulations supervisory council, as a result of its predatory lending. According to regulatory filings, after 18 months only $48.4 million in fees had been refunded. After program cuts totaling $33 million, BBG had just $76.6 million left with which to modify loans. BBG won’t give any specifics about the number of loans it has modified, saying only that thousands of customers have gotten relief. The Office of Thrift Supervision also claims the mortgage modification program is working as it should.
But the sad fact is, even though a homeowner’s new monthly mortgage payment may be reduced to 38 to 40 percent of the homeowner’s after tax income, this is still much higher than the normal 28%. So even after completing the mortgage modification process, many borrowers still struggle to make their payments. An Alabama loan processing firm reports this startling fact: After making a few payments under the modified loan terms, approximately 50% of the loans still go bad.