How Do Home Loan Modifications Work?

Home loan modifications are big news right now, as a result of the housing crisis we have experienced. These days, many homeowners are at risk of foreclosure due to monthly mortgage payments that exploded in size. This was often due to an adjustable-rate mortgage loan that passed the adjustment point.

This is the primary reason why home loan modification programs were introduced. Spurred by the federal government, some mortgage lenders are modifying the existing mortgages for customers who fit a certain profile (i.e., people who are most likely to face foreclosure). The idea behind all of this is to try and get the foreclosure crisis under control.

But what are home loan modifications, and how do they work anyway? These are the questions we will address in this dose of Mortgage Wisdom.

Order Your Loan Mod DVD Today

The folks from Credit.com have created a new DVD that walks you through the home loan modification process, one step at a time. It’s actually a kit that comes with software, forms, video instructions, customer service support and more. And it’s pretty fairly priced too, when you consider the financial significance (and size) of the average mortgage loan.

Click here to order your DVD kit

Modifying Home Loans for Struggling Homeowners

Mortgage loan modification is nothing new. Lenders have been modifying home loans for years. But modifications are in the news a lot lately due to the economic problems we are having. More U.S. homeowners will face foreclosure in 2009 than ever before in our history.

This is unfortunate for all parties involved, including the mortgage lenders. So home loan modification programs are on the rise, and they are being used to prevent foreclosure in many cases. If a lender can alter a loan that protects their investment while also keeping the homeowner in the home, then everybody wins. That brings us to how a loan modification works.

How Modifications Work

The theory behind a mortgage modification is fairly simple. The homeowner and the lender work together to find a way to make the loan more affordable, with the goal of avoiding a default situation that would lead to foreclosure. The most desirable modification is one that allows an at-risk homeowner to switch from an ARM loan to a fixed-rate loan (ideally with more affordable payments).

A brief history lesson is in order here:

The original “bank bailout” of 2008 was partly designed to encourage lenders to offer home loan modification plans. But as we now know, this didn’t happen as much as the government wanted. Banks used the government funding to shore up their infrastructure and cover their losses — not to help struggling homeowners. So in November of 2008, the FDIC rolled out a program to provide incentives to banks for modifying certain mortgages.

As of this publication date in February 2009, the idea of home loan modification still doesn’t seem to be working. At least, it’s not working the way the federal government wants it to. Part of the problem is that modifications require the approval of everyone with a vested interest in a particular mortgage loan. And since these loans are often packaged and sold through Wall Street as “mortgage-backed securities,” that kind of approval can be complicated.

Here’s the bottom line on this subject. In theory, home loan modification programs seem like a good idea. But in reality, they simply aren’t being offered on enough to make a difference in our economy.

1 Comment

Other Links to this Post

1. What Happens During the Foreclosure Process? — February 28, 2009 @ 9:35 am

Leave a comment