The Truth About Mortgage Modification

Loan modifications are supposed to help homeowners avoid foreclosure.

Loan modifications are supposed to help homeowners avoid foreclosure.

To help address the mortgage foreclosure crisis of 2008, President Barack Obama introduced a financial stability plan to try to help people who were having difficulty paying their mortgage. One component of that plan allows homeowners to apply for various relief measures to help avoid foreclosure. One such measure is the Home Affordable Modification Program, also called HAMP, which allows eligible homeowners to apply for a mortgage modification. As with many good intentions, however, what really happens is sometimes different from what was planned.

Loan Modification

Under HAMP, typically the principal of the loan stays the same, but loan servicers lower the interest rate, or extend the terms of the loan -- from 30 to 40 years, for example. Other types of agreements the lender may make are intended to reduce the amount owed, or to add any late payments to the loan balance.

Reluctant Lenders

The government encourages banks to modify loans under HAMP, but cannot force them to do so. Banks won’t qualify you, for example, if your payments under a loan mod still exceed 31 percent of your income. Not only that, banks appear to be stalling when it comes to granting borrowers a loan modification. According to a report on “PBS NewsHour,” as of October 2010, only half-a-million Americans received a loan mod through HAMP, even though the program was supposed to have helped several million by that time.

Horror Stories

Story after story, from real people who have applied for a loan modification, point out that banks give them the run-around. Homeowner Lauraine Yaffe told “PBS NewsHour” that it was a “nightmare” to even get an answer from her mortgage provider. Lee Braun, another homeowner, told “PBS NewsHour” that he dealt with nine different service representatives, none of whom ever returned any of his calls.

Foreclosures

Perhaps the worst that can go wrong, is to make your payments through a loan modification program and be foreclosed on anyway. That’s what happened to Yaffe. She qualified for a standard three-month trial HAMP modification that lowered her payments. When she asked about the permanent modification after the fourth month, her bank told her it was still under review, but that she should still send her modified payments anyway. Two months later, Yaffe got a letter from her bank stating that she did not qualify for a loan mod after all, and that the bank had scheduled her house for auction in two months. Yaffe managed to postpone the auction another three months, but she owed more than $20,000 in arrearages and fees. Other homeowners report that bank representatives say they never received documents, stalling the process so long that foreclosure happens during the wait. Peter Macaluso, a California attorney, told Market Watch that he represents borrowers who have been foreclosed on by their lenders while waiting for a loan mod to go through.

No Incentives

Market Watch reports that even though HAMP tries to establish certain standards that lenders should adhere to regarding loan modifications, enforcement of the rules is lax. The bottom line is that lenders are not interested in doing loan modifications, even with government incentives, according to Market Watch. Most lenders are not set up to do loan modifications, and the sheer numbers of homeowners who apply under HAMP is so great, that lenders are reluctant to hire the personnel to handle the process. It’s faster and easier to foreclose. Diane Thompson, an attorney with the National Consumer Law Center, told Market Watch that loan servicers prefer refinancing, foreclosures and short-term repayment plans to loan mods.

The Formula

What homeowners may not know is how banks determine who qualifies for a loan mod. HAMP requires lenders to use a “net present value” analysis, according to Market Watch. This analysis looks at your income, credit score, debt load and the future forecast of the value of your home. After plugging in the numbers, the banks determine the best outcome for them: loan modification, short sale or foreclosure.

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