Loan Modifications…A New Solution?

In a market heavy with foreclosure notices and flooded with the daily news of struggling and failing lending banks, borrowers are seeking home loan modifications as a possibility of surviving their high interest loans. Banks are apt to offer loan modification only a as a last resort, mostly due to the fact that many banks see loan modification as a way to temporarily avoid a foreclosure, but ultimately not preventing it.  They feel that loan modification will only delay the inevitable and that the borrower will still default at a later time.

What is this process and how is a loan modified? Basically, loan modification is exactly what it sounds like: both the lender and the borrower come to an agreement whereby the structure of the loan contract is changed. This usually means the lender giving the borrower a reduced interest rate, easier repayment terms and possibly lengthening the loan term to reduce the monthly repayment and help avoid foreclosure. Loan modification can be initiated by a government, for example, the Indy Mac fallout. The government will intervene and will modify some 25,000 troubled home loans to assist the borrowers in avoiding foreclosure.

Why is it that there are all these borrowers looking for loan modification? A high number of borrowers are stuck in costly and unaffordable high interest rate loans. Since the value of their homes have depreciated to below what they currently owe on their homes, the borrowers seek loan modification to try and lower their interest rate and monthly payment to make better sense of the whole situation. In fact, modifying the loan is the borrowers’ final solution to the problem of impending foreclosure. A significant number of borrowers with negative equity are trying to achieve loan modification to decrease the interest rate they pay, so that they can avoid foreclosure.

Is loan modification offered by all the banks? While the majority of banks do not like modifying loans; almost all would ultimately offer this to borrowers who are very close to foreclosure. Due to the negative benefits for the lender, they usually see this as the last hope for a troubled debtor who is close to foreclosure. A lender may refuse to modify a loan even though the borrowers seek to do so, after comparing what they expect to lose in that process compared to losses expected from a foreclosure.

Ultimately, securing a loan modification could help you avoid foreclosure and keep your credit rating healthy. However, convincing your lender to agree to alter the loan can be a difficult and possibly unsuccessful process. In a case where the lender will take a substantial loss on a loan, it may be in the lender’s best interest to modify the loan for the borrower.

Scott  is a nationally recognized expert specializing in bringing new solutions to homeowners.  Scott has also helped release hundreds of Americans from the “credit prison” that too many people find themselves in.  If you find yourself  “payment pinched” or when you or one of your friends finds yourself needing real answers and real solutions to credit issues, you can confidentially contact him at 800-466-5626 ext 159 or at Scott@AmeriFirst.com