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Loan Modification: Stop A Foreclosure Before It's Too Late

Aug 15, 2008
Hundreds of thousands of Americans have either been foreclosed on, or are facing foreclosures. Neither the banks, nor the homeowners want this to happen. Banks don't want it to happen because they're forced to write down foreclosures, which runs the risk of the bank failing. Homeowners don't want to lose their homes.

The root cause of most foreclosures is bad lending practice at the start of the lending process, it used to be that home buyers had to show 30% of the list value of the home as a down payment, and a year's worth of pay stubs to get a mortgage. Equal opportunity in lending laws meant that this was deemed discriminatory. When this was combined with an incentive structure that paid huge commissions for loan origination, based on the value of the loan, the end result was ultimately predictable.

The loans that were written are commonly referred to as "liar loans", and the upper end consequences can be read in the financial section of your local newspaper, and in the Wall Street Journal, where they've made the front page; most of the bank failures we've seen so far have come from banks leveraging mortgage driven securities.

What doesn't make the papers is the impact this fiasco has on American homeowners. Millions of new homeowners, often ill educated on what, exactly they were signing, moved into homes with Adjustable Rate Mortgages, often with interest only introductory periods. When those rates adjusted (with the Federal Reserve rate), or the "interest only period" ran out, those home owners suddenly saw their monthly housing bill triple.

Even worse, because of the sudden price collapse on housing (and in many markets, it's nowhere near bottom, and they can't even see where bottom might be, those home owners are stuck with a mortgage that's worth more than the probable resale value of the house.

This is where loan modification comes in. Loan modification is a negotiation technique, and with leg work and persistence, you can get various terms of your loan modified. This is, in some ways, like a refinance option.

Mortgage loans are built around two terms, the interest rate and the time period over which the loan has to be paid off. The interest rate is the percentage of the remaining balance that the bank takes as a profit on each payment, and it's usually compounded. Compound interest, over the lifetime of a typical mortgage, adds up to a hefty sum of money.

Now, most loan modifications are either reductions in interest rates, or extensions of the term of the loan. A very few will actually re-assess the value of the home and adjust (write off) part of the loan. To get a loan modification package, you have to demonstrate a hardship that has reduced your income substantially, one that would keep you from making regular payments, while still maintaining a regular income stream.

You'll want to talk to a loan modification specialist, or a mortgage/credit counselor. Having someone who works with financial services products who's in your corner is a handy way to start. Next, you'll want to talk to your lender's loss mitigation department.

The good news about loan modification is that the banks will usually be cooperative on this, once you talk to the right person. They don't want a foreclosure, and a loan modification is very much a case of "Well, it's this or nothing" That being said, expect the process to take at least 6 months and up to a year to happen, plan early. If you're already getting collection calls on your mortgage, the odds of getting a successful loan modification have gone down considerably. Having a specialist in loan modification can help; much of the time spent in getting a loan modification done is spent trying to talk to the right person; you'll start out at low level people who can't say yes, and you'll have to work your way up until you find the person who can. (Real power comes from the ability to say "yes" to a proposal).

Once you find the right person, you're going to have to demonstrate good financial habits. You'll have to demonstrate the ability to make a budget and to live within it. Getting a loan modification is very much a "last chance" sort of thing for most people with credit habits. In particular, if you're unable to meet your current house payment, get in the habit of either making partial payments or saving that money, rather than using it to pay down other debts. The reasoning for this is that when the loan modification is negotiated, your lender is going to ask you to make at least some part of a "good faith" payment, which will usually be at least half, if not all of, the back payment penalties and fees, plus any attorney's costs. If you don't have the cash on hand, this is going to be a sticking point,more loan modification negotiations blow up over this than anything else.

And, once you've negotiated a loan modification and have lower payments, save the difference. Most home owners run into problems not because they can't afford their homes, but because they refuse to scale down their lifestyles to match their incomes. Even then, be a realist. If you can't really afford your home, it's time to try to sell it, or, in a worst case scenario, let it go into foreclosure.
About the Author
Peter Baptiste is known as the Foreclosure Doctor Online. Feel free to visit his blog where he provides a wealth of information on a regular basis. The Foreclosure Doctor Online
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