subject: What Is A Loan Modification? [print this page] What Is A Loan Modification? What Is A Loan Modification?
This first paragraph is a prologue to the question. The words loan modification were really never used until late 2007. Up until that time everyone who owned a home had equity in their property. So home owners would refinance, or take a second mortgage against their house and take that equity money out and spend it on items and things they wanted. This, of course, kept the economy flowing and everybody was spending money. Then came late 2007, early 2008 when the economy started to tank. Property values started a downward turn, unemployment started to rise, jobs were getting scarce, cash became harder and harder to have, credit card debt went through the roof, and everyone has a theory of why this happened.
So with home owner's property not worth what they owed on it, it was impossible to get refinanced or get a loan from the lending institutions. All of a sudden, most people were not as cash rich as they normally were and this is where it all started. People started getting behind on their credit cards, automobile payments, and their house payments. They could not refinance to lower their home mortgage payments, thus the emergence of the loan modification.
The last time people used loan modifications was back in Jimmy Carter days when this same thing happened. Banks were forced to do loan modifications, in order to stay afloat. There were no government bailouts available, so they had to keep a cash flow or close their doors. Once the economy got back on track, banks went back to refinancing and loan modifications disappeared. Once again, in today's economy, the loan modification is needed.
A loan modification is not refinancing. There are no credit checks, no appraisals, no closing fees, no title searches, none of the paperwork, or fees that are involved in refinancing. All a loan modification does is change the terms of a home owner's existing mortgage, through their current lender, to benefit the home owner. This can be done in numerous ways. 1) A reduction in the interest rate is the most common. Just changing a $250,000 mortgage from 6.5% to the current market of 4.75% saves $97,200 over the term of the mortgage. But, right now the banks will do better than this. 2) Lengthening the terms of the note. Banks are willing to change a 30 year note into a 40-50 year note. This combined with the interest rate change can drop a house payment 30-50%. 3) Reducing the principal of the note. This is something that rarely happens and when it does it is usually about 10%. If someone tells you they can get you a principal reduction, chances are they are lying.
Why are banks doing these loan modifications? Basically, because the banks have to. The government has implemented a number of programs that require all the banks and lending institutions that took TARP money to follow their guidelines for loan modifications. Plus, the government pays the banks to do loan modifications. This money of course comes out of our tax dollars, but that is a different subject for a different blog.
The banks will make it difficult to do. This is not an easy process, and if you are going to try to do this on your own, be prepared to be extremely patient, have lots of time to sit on the phone trying to get a hold of the right person, have a fax machine available to send them all the documents they require, once a month, read up on all the laws and programs that relate to loan modifications (both federal and state) because the bank will play dumb (if you don't know, they won't tell you). There are 14 states that now have loan modification mediation programs in place that stop the bank from bullying the home owner, but the bank will not tell you this. Persistence and knowledge are keys to getting a loan modification done. Get professional help, it will save you lots of money in the long run.
