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Loan modifications seem like a pretty simple concept. You can’t pay your mortgage so the government “encourages” your mortgage provider to give you a break. The break can come in the form of lower interest rates, a longer tenure, deferring a part of your loan or even “forgiving” a chunk of your loan (that doesn’t happen all that often).

The key word of the above paragraph is “seems”. The truth is not even close to simple. Banks are businesses and like all businesses, successful ones anyway, they need to know where they are going, what the future will look like in order to decide what decisions to make today.
Investors and business analysts also want to know what the future of business looks like. Mortgage and securities analysts have a difficult job on their hands because the future is so difficult (read impossible) to predict accurately.

Loan modifications depend on how the future looks to analysts because mortgage providers decide what interest rates, conditions and how generous (how much they can afford to call a loss) they are going to be depending on how good or how bad things look.
Analysts look at how big companies prepare themselves for the future as a way of checking their own predictions. How can an analyst see how a big company like a bank or mortgage provider is preparing for the future?

One way is to see how much they are setting aside for bad loans and delinquent payments. If a bank predicts the economic future is looking bleak they will set aside larger amounts of cash in case their customers (borrowers) fail to pay. Of course even this is not as simple as all that. If a company wishes to boost their profit or improve how their accounting looks they can play with these figures.

Nevertheless, alarm bells ring in analysts ears when big companies, like Citigroup, reduce their contingency reserves and they can’t figure out why. This is what happened this week and analysts are still asking why.

Normally when banks stock away less cash to cover for loan losses it can be interpreted as a sign of improving credit conditions, but when analysts looked at the rest of Citigroup’s earnings report there was little if any proof of borrower difficulties easing off. What analysts have noticed is that non-performing loans has gone up by 16%, 7% and in the last quarter by 5% which would indicate an improvement in borrowers’ ability to pay but seems to be more of a reaction to the loan modification effort by the government that is improving underlying credit quality.

So is Citigroup being too optimistic or do they believe that the government’s programs have a chance to control the credit crisis? One thing is for sure in business, time will tell.

Related posts:

1. Loan Delinquencies Fall As Banks Get Serious With Loan Modifications
2. Citigroup and Merrill Keep Eating Losses
3. Loan Modifications And Balloon Payments What Is The Cost

Related posts:

1. Loan Delinquencies Fall As Banks Get Serious With Loan Modifications
2. Citigroup and Merrill Keep Eating Losses
3. Loan Modifications And Balloon Payments What Is The Cost

Certified Public Accountant Tom Critelli has never regretted the day 18 years ago when he gave up a secure accounting job to become a homebuilder. But he's thought about it recently as the housing market has continued to sink.

Amortization is a term associated with mortgage loans and is mainly used in relation to loan repayments. Technically defined, amortization is an accounting method in which expenses are accounted for over the useful life of the asset rather than at the time they are incurred. Amortization is similar to depreciation in that the value of the liability (or asset) is reduced over time. Simplified in terms of a mortgage, amortization is a payment each month that combines both interest and the principal amount and is paid over a specific period of time. The concept of amortization can seem complex and understanding the process is essential to becoming an informed borrower.

The simplest way to explain the difference between amortization and depreciation is understand the type of the financial events that they are associated with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time. Mortgage amortization is the periodic reduction of the principal balance of a home mortgage that is usually fixed in the terms of the loan.

For the purposes of a home mortgage, amortization is the reduction of the principal or capital on a loan over a specified time and at a specified interest rate. Interest is the fee paid by the borrower to reimburse the lender for the use of credit or currency. At the beginning of the amortization schedule a greater amount of the payment is applied to interest, while more money is applied to principal at the end. In other words, a borrower will start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down the actual loan amount.

A mortgage is amortized when it is repaid with periodic payments over a defined term. The goal is for the mortgage to be fully amortized, an elaborate way of saying paid off, at the end of the term of the loan. As more and more of the principal is paid down, the interest declines, leading to greater mortgage amortization in the later years of the loan and a subsequent increase in the borrower’s equity in the property.

One thing to consider when taking out a mortgage is the amount of money which will be paid out over the life of the loan. A mortgage calculator which provides an estimate of monthly payments and amortizations can make it easier to see the entire schedule and impact to the borrower. Negative amortization, which can occur in financing instruments like a balloon loan, exists when the monthly mortgage payment is not big enough to cover the full amount of interest due.

The process of amortization is an easy one to understand once you know the basics and get the idea of how it all works. Mortgage amortization, as used in real estate, is when the principal balance on a mortgage is reduced over time as the home owner makes monthly payments. Amortization describes the process of paying off a loan in regular, typically monthly, installments. As a general rule, amortization is desirable, because if a mortgage is not amortizing, it means that the borrower is not making any headway on the loan.