Principals Archives – Refinance – Mortgage Refinancing Rates And Information

Loan Modifications With Principal Cuts Attract Lenders Attention

January 13th, 2010 No comments

Loan Modification consultants have being saying it for a long time; the best loan modifications are those that reduce the balance of the loan. This might seem obvious; of course borrowers are going to prefer loan modifications that reduce the amount they owe. What is not so obvious is that these types of loan modifications may be the best kind for lenders too.

Loan Modifications can use a variety of tools and measures to reduce the monthly payments of a mortgage. Reducing monthly payments is considered to be the main objective of a loan modification, as a way of giving troubled borrowers a break so they can continue to pay their mortgage. This can be done by:

1) Reducing the interest rate of the mortgage, either temporarily or permanently.

2) Extending the term of the loan, which means giving the borrower longer to pay the loan back.

3) Rolling interest payments to the end of the loan, this reduces monthly payments but creates a huge payment at the end of the loan.

4) Principal reductions of the loan balance. Here the bank or lender “forgives” or writes off a portion of the loan.

The Obama Administration does not control which measures lenders use on loan modifications and they certainly don’t require lenders to cut mortgage principals, what’s more, until recently principal reductions seemed unthinkable, a nice idea but not very practical. It must be said that forgiving debts is a nice thing for friends to do, but it doesn’t sound like a good way for lenders to do business.

However, recent reports are showing that principal reductions could be a key factor in creating cost efficient loan modifications for both lenders and borrowers. One of these reports was published by the Lender Processing Services June 2009 Mortgage Monitor and concluded that re-defaults on loan modifications with a principal reduction element fare much better than those based exclusively on interest rate reductions. The report states that “the success rate for loss mitigation-related loan modification hovers in the 30-40% range, with a higher success rate for loan modifications involving a reduction in unpaid balance.

The success rates of loan modifications with principal reductions is so much better than with other methods that lenders are beginning to listen to the data and increasing their principal reductions on mortgages of troubled borrowers.

You might still ask yourself why banks or lenders would be willing to cut unpaid loan balances instead of using other apparently cheaper measures. The key, we hinted at above, are foreclosures. Foreclosures are expensive for lenders, selling in a buyers’ market and the costs associated with selling a property are not cheap. Having said that any kind of loan modification carried out to avoid foreclosure is expensive for lenders whether they reduce interest rates, extend the term of the loan or reduce the principal balance, what makes it even worse is when borrowers re-default on their loans after the loan modification. Because foreclosure re-defaults are much lower on loan modifications with principal reductions, lenders are starting to think they might be cheaper in the long run, which is good news for the fortunate few that actually qualify for a loan modification.

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Loan Modification Plan Stalled By Mortgage-Backed Securities

August 17th, 2009 No comments

Home loan modifications have been presented as the silver bullet that will kill the evil wolf scaring the living daylights out of investors and homeowners. The government does seem to be willing to place its money (or own money) where their collective mouth is. The White House has invested $75 billion of our hard earned bucks into the Making Homes Affordable with the hope that it will prevent 3 to 4 million Americans from losing their home to a bank foreclosure.

Unfortunately the plan is not exactly burning rubber and is off to a slow start. At the moment only 9% of eligible homeowners are taking advantage of the loan mod plan and have modified their loan terms. The government is not happy with these figures and have begun to pressure and arm-twist banks and lending institutions to get their finger out and start modifying. In a recent report the government named and shamed banks that were not pulling their corporate weight behind the mortgage modification program and are not facilitating the modifications borrowers need.

Why is this the case? Why are banks so slow to act?

There are various reasons, most of which we have already discussed in articles here at blownmortgage.com. These include:

1)   Banks are not currently set up for loan modifications. They are set to sell loans and then collect the payments not reduce principals and reduce interest.
2)   The large volume of loan mod applications in such a short period of time.
3)   Lack of information and understanding about the program and how it works.
4)   Mortgage backed securities.

Why mortgage backed securities?

Mortgage backed securities are products like futures and stocks companies can buy or sell. Obviously just like with the purchase of the stocks of a company the purchase of mortgage backed securities provides the owner with a say on how the mortgages are managed.

This is well illustrated by the story of many homeowners that cannot modify their loans because the company that has bought a security backed by their mortgage will not allow them. For instance Wells Fargo may say no to a loan modification you request even though they don’t own your mortgage.

This is caused by ambiguous rules and a rather shady web of interests and ownership. This is rather sad because it means that the group that is more likely to need help, those whose mortgages were sold or used as a security cannot receive the loan modification they need to stabilize their situation.

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