Do Loan Modifications Really Help Prevent Foreclosures?
As the real estate crisis sweeps across America
, homeowners who are facing foreclosure are hoping to find a solution before they lose their homes. For many, especially those with subprime adjustable-rate mortgages who suddenly find themselves being asked to pay a higher interest rate and more money every month, the only hope is to change the terms of their mortgage by either refinancing or getting a loan modification. But for how many homeowners does this really work? Is loan modification a solution, or just a way to put off the inevitable foreclosure?What Is Loan Modification?
Loan modification is different from refinancing. When you refinance your mortgage, you take out a new mortgage loan and close the old one. Its almost as if you are applying for a new mortgage, with all the same fees and credit checks and application process.
A loan modification is when one or more terms of your existing mortgage loan are changed. There are several ways that mortgages can be modified to the benefit of the borrower including reduction in principal, reduction or change in the interest rate, reduction in late fees or other penalties, a lengthening of the loan term, or capping the monthly mortgage payment to be a percentage of household income.
Company or Government Loan Modification?
If you go online you will find hundreds companies that claim to be loan modification specialists. They state that they will renegotiate the terms of your mortgage with your lender in order to reduce your interest rate and even your principal amount. Of course, the service is not free; they all charge a fee. But the loan modification companies claim that the fee is a fraction of the expense associated with refinancing, while providing equal benefits. A mortgage loan modification is supposed to provide the homeowner with immediate savings by reducing monthly mortgage payments.
But consumers should beware because scams abound! Unethical loan modification companies ask homeowners for an upfront fee (often one months mortgage payment or more) in order to initiate a loan modification program. At best, the homeowner may end up paying for a service that could have been done for free by a non-profit organization or loan-modification assistance program. At worst, the homeowner writes a check and the scammer disappears.
In some cases, delinquent homeowners receive a phony letter that appears to be from their lender informing them that they are eligible to enroll in a free program to save their home. The fake letter may even include a warning to beware of foreclosure rescue scams! If the customer responds, they will be told that they have been approved for a more affordable loan as long as they pay additional delinquency fees. You can guess who collects these fees!
Then there's President Obamas program, Making Home Affordable. The initiative provides cash subsidies to mortgage lenders and loan servicers that modify at-risk loans. You can get information about the plan at www.makinghomeaffordable.gov. On the home page, click on Modification. Youll see a checklist of questions to determine whether or not youre eligible for the plan. If you qualify for consideration, youll be asked to gather information about your finances and then contact your lender directly. There is no fee involved and no intermediary.
But Does It Work?
The federal loan modification program has had mixed reviews. Some analysts assert that for at-risk borrowers, the cheapest and least stressful way to escape their difficult mortgage debt is to just walk away from it. The federal program has been criticized for being too complex and not publicized enough. And for the average consumer, trying to do a loan modification is daunting at best. It requires staying in contact with the bank, faxing endless documents, and following-up on a daily basis for weeks and months.
If you are determined to stay in your home, the federal loan modification program may work for you. But to succeed you have to be able and willing to pay your mortgage even if your home has declined in value, and you need to be very persistent!
by: George Emerson