Loan Modifications in General...

Loan modifications are only truly relevant in the real estate world when property values have dramatically declined.  Since the  real estate economy has been rising since 1997, most people here have had no need to learn about loan modifications.  Therefore, when a homeowners mortgage needs to be addressed for any reason, refinance is the initial thought.  Refinancing is advisable in a stable or increasing market.  It gives homeowners the ability to take cash out when needed, lower their interest rate, fix their interest rate, as well as other options.

In today's declining market, refinancing is available to only a select few. Getting approved for a traditional refinance is extremely difficult.  This is due to Wall Street no longer purchasing loans from originating banks, lenders have cut programs to less qualified borrowers, and loan to value ratios have substantially increased .  If the government is not guaranteeing buying loans then most brokers and lenders will not release their funds. Fannie Mae, Freddie Mac and FHA are the Government Sponsored Enterprises (GSE's) who are supposed to come to the rescue but are unable to do so in the recent financial crisis.

Potential  homeowners or current homeowners looking to get financing must now have superb credit , lots of equity in the home (or larger down payments), provable job security, disposable income after the bills are paid and proof of the ability to repay a large mortgage. If any of these conditions these conditions are not met, getting a refinance (or new) loan is almost impossible.  When considering refinancing in a market where equity has evaporated, causing loan balances to exceed property value, there is not option to refinance.  That is when  Loan Modification comes into play. 

A Loan Modification is a negotiation with your current mortgage lender(s), in an effort to possibly reduce the loan payments, interest rate, or even the loan balance. A loan modification should be employed if the equity in the home is less then 5%, and the homeowner has had a recent financial difficulty, which in today's market applies to about 70% of the populace due to the recent word financial crisis.

The general perception of many homeowners is that the 'bank is trying to take my home'.  That is not true. No bank wants to foreclosure on a property in a declining market. The bank lent the borrower the money so they could collect the principal and interest payments and keep the note securitized. If you are paying on time and values are holding or increasing. your mortgage note gets sold and resold for huge profits. Banks make fortunes off borrowers who make every payment on time through the life of a loan.

In 2008's real estate market, banks stand to lose $0.35 to $0.60 on the dollar for any foreclosed property.  This is a gigantic loss, and the banks today would rather collect a lower payment than none at all and own a vacant home.  Declining property values combined with constricting lender guidelines and adjusting interest rates have resulted in the modification boom. Basically, when you owe much more on your home that it is worth, you are in deep trouble. No one is going to buy a home for 15% - 30% above market value and no lender is going to refinance that property. 

Your mortgage is the collateral for the note that a bank lends a borrower.  Realistically speaking, no bank would originate a note lending at over 100% of the value of the property. Even lending at 100% is unreasonable.  Millions of Americans have taken out high LTV loans in markets that were at the time appreciating but now have rapidly depreciated. Then, when the borrowers ARM adjusts and he can no longer make the payment a bank will try to refinance, only to discover there is little chance.

Most believe their only option is to foreclose.  Since they cannot make the payments, sell, or refinance, what other options are there ? The first option that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.  With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to re-examine their strategy.  In today's economy, banks are willing to modify loans to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.

For more information about Loan Modifications or if you just need help,  please give us a call at: 949.690.7525. I will be happy to assist you.