Loan Modification: Magic Bullet for Desparate Sellers?

Lately, the buzz-word being used by everyone it seems is the term; “Loan Modification.” First, let’s make sure we all understand what the term actually means. Obviously, we’re talking about a mortgage (loan) on a home that is changed (modified) in some form, from its original terms. Loan Modifications as opposed to a Repayment Alternative Plan, focus on the structure of the mortgage. Possible modifications include; converting an adjustable interest rate to a fixed rate, decreasing the rate, or extending the length of loan from say, 30 years to 35 years. In the rare exception, a lender may forgive a portion of the principle. Yea right, don’t hold your breath on that last one! :)

While in theory this sounds like the cure to the Mortgage Meltdown nightmare we’re in, the problem is, Loan Mods will probably end up NOT actually helping that many desperate home sellers as we’re led to believe.

Here’s why:
First of all, it’s a political smoke screen. Loan Modification is being pushed hard by the government. That fact alone almost guarantees failure or very little chance of success. The Feds are bullying the banks into offering Loan Mods to their clients without understanding some very elementary facts about the root causes of the mortgage mess, but we'll cover that at another time.

Back to why Loan Mods won’t help stem the tide of foreclosures.

1: Many of these sellers still won’t be able to make their payments even at a reduced monthly payment. About 30% of loans modified in the 1st quarter of 2008 were 60 days delinquent within 5 -6 months.

2: Lenders trying to appease their shareholders and watch their bottom line will only go so far to help the borrower.

3: Investors that make up a large portion of these delinquent loans don’t qualify for any assistance from the lender at this writing.

4: Many homeowners are so “upside down” that they have to be convinced it’s in their best interest to stick with a loan that greatly exceeds what their home is worth.

5: Scores of homeowners in trouble don’t know about the loan mod option or would not take the considerable time necessary to work through their particular lenders program.

So there you have it. I hate to be a wet blanket, but don’t think the Loan Modification option is all that it’s hyped up to be. It will help some distressed homeowners to be sure, but it will be such a small percentage to even make a small dent in the mortgage meltdown tsunami, we now face.

If you have any questions about buying or selling a home in Ann Arbor contact the Wickland Group. Our experienced team of Realtors, marketers and support staff is here to help you with your real estate needs in Ann Arbor and throughout Washtenaw County. Expect only the best customer service and support from the team, taking all of the stress out of your real estate experience!

by Steve Wickland