Mortgage Loan Modification

A mortgage loan modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. It is like a debt settlement solution for your mortgage.

Modifying a mortgage rather than refinancing can be a better alternative and eliminate complex and costly closing rituals. With a mortgage loan modification you take the mortgage you now have and change the interest rate and payment requirements, just like an adjustable rate mortgage (ARM). And just like an ARM, a change in rates and payments does not result in the need for a new closing, appraisal, survey, legal fees, or taxes. In contrast, if you refinance a loan you will be required to have a closing and forced to pay an assortment of fees and taxes.

To modify a loan calls for the agreement of both the lender and borrower. Since a loan modification request typically results in less interest, many lenders have little reason to just say yes. On the other hand, as the idea of a mortgage loan modification becomes more prevalent, lenders can be expected to increasingly approve modification requests.

If mortgage loan modifications are given to borrowers that are not well suited for homeownership in the long term the loan modification only serves to delay the unavoidable while keeping the borrower in a state of financial distress. In such cases, the borrower may be better off moving to more affordable housing rather than continuing to pressure their finances and lives pursuing the unobtainable fantasy of homeownership. Additionally, modifications granted to unsuitable borrowers may be considered voracious.

It appears that the main purpose of a mortgage loan modification is to tilt financial reporting of delinquencies. In other words, modifying loans helps borrowers to make a few payments, allowing lenders to assertively rearrange the accounts and categorize them as current, instead of delinquent. Such practices appear to have been a key method in supporting earnings of many failed sub prime lenders prior to bankruptcy. Thus, without regulatory negligence or increased precision, it is hard to imagine that borrowers will benefit from mortgage loan modification in the long run.

Not every mortgage can be modified in fact, the majority cannot be. Most mortgage lenders don't hold onto your loan for long. They sell it to a government-sponsored enterprise, and they in turn, bundle your mortgage with others to create a mortgage-backed security, which works somewhat like a corporate bond. Then investors buy these securities. Since most can't change the interest rate on a securitized mortgage, they can't get a modification. A mortgage loan modification is specified when the original loan that is secured by a residence has terms that make it impossible for the homeowner to continue making the payments, thus risking the loss of the residence. There are many facts that explain why lenders are actually in favor of working with borrowers and their legal specialists in order to negotiate reasonable loan modifications.

All or portion of the outstanding principal and interest, past due escrow, late fees, and even costs may be rolled into the mortgage loan modification and thus will not be lost income to the lender. Since they are spread out over a long period of time, they do not create a problem to the borrower. Modified mortgages can use a step rate approach or an extended term methodology to provide for the repayment of the due and past due funds. The lower payments guarantee the repayment by the borrower while to the lender the added time is in fact money in the bank in terms of yet to be earned interest due.

With a mortgage loan modification, foreclosure is avoided and even though banks regularly foreclose on properties and sell the homes to other buyers for a fraction of a price, the slowing housing market has made it difficult for banks to discharge such properties and then recover any additional funds from the previous homeowners. Loan modification is a financially much more attractive solution for any lender. A modified loan protects the credit rating of a borrower and it also helps the lenders in showing less defaulting loans in their portfolio. This of course makes a good impression when the financial institution is pursuing potential investors.