Loan Modification Trends in the Mortgage Industry
Changing the terms of a mortgage so that a borrower ends up with a lower monthly payment is the primary reason for pursuing a loan modification. Loan modifications are the latest trend as borrowers struggle to hang onto their homes in today’s harsh economy. The inability to refinance because of the depressed housing market and also because of tighter lending requirements is one issue that’s fueling the demand for loan modifications.
No doubt previously lax lending criteria pushed the housing market to new highs. But those same lax criteria are the same reasons countless borrowers now find themselves with higher mortgage payments than they’re able to afford. Loan programs that did not require income verification or disclosure meant that many borrowers who should not have been approved were. Should any of these borrowers seek relief from loan modifications, lenders will be required to verify those borrowers’ income. It’s estimated that loan modifications may help up to 50% of the homeowners in danger of foreclosure because of their inability to make their mortgage payments.
There are several ways loans can be modified to result in a lower monthly payment. Interest rates can be changed, either permanently or temporarily. An adjustable rate mortgage can be changed to one with a fixed rate. Rather than the typical 30-year term, the term of a fixed rate mortgage can be extended to 40 years. Lenders also have the option, in select instances, to lower the balance of principal that’s due.
Although at first glance it appears that homeowners reap all the benefits of a loan modification, lenders benefit, too. The borrower’s lower payment helps that borrower maintain ownership rights. Therefore, when a loan can be modified, although there’s a cost, lenders reduce the risk of suffering an even greater loss; that which is associated with a loan default. Considerable time, money and legal work are involved when a borrower defaults and a home enters foreclosure proceedings. Loan modifications eliminate these costs. Plus the lender avoids the problem of taking a loss on the home’s sale. For all these reasons, loan modifications are better alternatives, even after factoring in their costs.
As a result of political pressure, lenders have come up with systematic loan modification programs which they can now offer to borrowers already in default and those facing the prospect of default. A recent program launched by the agency responsible for insuring most deposits, the Federal Deposit Insurance Corporation, or FDIC, offers incentives to loan servicers that implement loan modification programs that are systemic, sustainable and targeted towards those homeowners most at risk of defaulting. Program guidelines make it clear that such programs must not be thought of or mistaken as social programs. Quite the contrary, in order to be approved for a loan modification, the borrower must provide documented proof of his or her ability to properly manage whatever modification is made to the loan payment, both now and in the future.
As part of its recent takeover of the Indy Mac bank, the FDIC has been hard at work negotiating workable loan modifications for desperate Indy Mac customers. For most, accepting the lower payments has brought much needed relief. But will loan modifications prove to be successful in the long run? Only time will tell. It’s one thing to offer borrowers lower payments, but long term success hinges on borrowers’ ability to remain current with their mortgages. Initial loan modification results are positive. However, data must continue to be collected and analyzed over the next several years. If successful, expect to see more loan servicers offering this type of relief.