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Loan Modifications and Home Loan Refinancing -- Five Years from Now

[Feb 4, 2010.]


Though it's hard to envision now because so many people are still involved in a crisis, there will come a time when the mortgage finance market settles into some form of normalcy after this intense period of volatility.

One question that no doubt must be considered is what impact the loan modification trend will have on the long term health and practices of the refinancing market.

Here are some thoughts on what mass loan modifications might mean to refinancing five years from now:

1. Government Involvement Here to Stay?

Government involvement in the mortgage markets, at this point, is so thorough and penetrating that it's a wonder that a representative of the U.S. government is not called upon to sign on the dotted line before any mortgage is granted.

From the Fed's purchase of mortgage-backed securities, to the FHA's increasing role in helping people buy homes, to the absorption of Freddie Mac and Fannie Mae into the government itself, the U.S. government has played a giant role in the mortgage market of the past years.

Loan modifications are yet another instance of this trend. Five years from now, will the government still be the tacit co-signer on 90 percent of refinances that happen in this country?

2. Loan Modifications and Credit Scores

Although certainly there were unsavory activities on the part of both borrowers and lenders, there really are some people who got caught up in the foreclosure problem through no--or not much--fault of their own.

It will be interesting to see how the credit rating agencies and the banks treat such people in future years. If you have a loan modification or a foreclosure on your credit report, will banks refuse to refinance your home loan ever again, or will a more lenient attitude be adopted?

3. Refinancing and Equity: Forever Linked

The first two of these thoughts have ended with questions. This third section deserves a declarative sentence:

Banks and borrowers alike have realized the importance of having equity in a property when it comes time to refinance a home loan.

Without equity--without value that the bank can take in the event of default--there is no reason for a bank to do a refi deal. Likewise, homeowners must always remember that "cashing out home equity" is something that is not to be done lightly, because that opportunity may happen only once in a lifetime.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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