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Mortgage Loan Modification to the Rescue

[Mar 27, 2009.]


What is modification, and how can it help homeowners avoid foreclosure? The answer depends on individual circumstances and mortgage loan terms, real estate market trends, and the current value of a home as compared to its mortgage balance. Here are a few ways a modification can assist struggling homeowners.

Mortgage Loss Mitigation 101: Lenders Lose on Foreclosure

It's important to know that how mortgage loans are bought and sold to investors on what's called the secondary mortgage market can affect how (or if) lenders offer loan modification or other loss mitigation programs. Unfortunately, the mortgage industry has become very complex, and this can cause delays and denials when contacting lenders for assistance. Homeowners who are facing foreclosure (and ruined credit)  need to persist when seeking help. The sooner help is requested, the better. Waiting until foreclosure is underway is costly, and reduces potential savings for the lender. Lender loss mitigation programs are motivated by reducing the costs associated with foreclosing home loans and managing foreclosed properties. 

Modification Can Lower Rates and Stabilize Payments

Homebuyers often don't think beyond getting the keys to their new home, and may agree to borrow more than they can afford to pay, or to accept mortgage terms resulting in negative amortization or rapidly increasing payments. Mortgage loan modification assists homeowners by changing the terms of a mortgage loan. Here's how it works:

  • Changing Loan Type: Borrowers with adjustable rate mortgage (ARM) loans can find themselves in trouble if their mortgage terms allow for steep increases in rates, which can cause an unmanageable increase in monthly payments. Homeowners living in areas where property values have declined cannot refinance to a fixed rate (FRM) mortgage because their home values have declined below the amount they owe on their mortgage. Modifying loan terms from ARM to FRM stabilizes monthly P&I payments and eliminates features such as negative amortization.

  • Eliminating Negative Amortization: ARM and other "exotic" mortgage terms may provide for very low initial payments. When the introductory rate expires, such a mortgage may allow for negative amortization. This means that unpaid interest during the initial period is added to the mortgage balance. Modifying mortgage loans with negative amortization eliminates further increases in the mortgage amount.

  • Reducing Rates:  Reducing interest rates lowers mortgage payments and facilitates reducing the mortgage balance faster.

  • Capitalization: If you owe more in past due payments than you can afford to pay, your loan may be modified to adjust the due date while adding the amount of unpaid interest to the loan balance. Capitalization isn't feasible in situations where the mortgage amount is near or more than home value.

  • Reducing Loan Amount: In cases where property values have sharply declined below mortgage amounts, lenders know they cannot recoup losses through foreclosure. They may adjust mortgage amounts to reflect current property values. The government is sponsoring a refinancing program that can assist borrowers by reducing mortgage amounts.

Homeowners who cannot qualify to borrow under conforming mortgage terms should contact their lender's loss mitigation department to learn about loan modification options.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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