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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.

Related posts:

1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Only Hope For American Dream
3. Is Bank of America headed towards principal reductions?

Related posts:

1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Only Hope For American Dream
3. Is Bank of America headed towards principal reductions?

Obama’s Loan Modification Program is a nice idea with good intentions. A superficial look at the program, what it does and how it does it, would make you think it might or even should work. However the reality is different, unfortunately only a very small number of borrowers are benefiting from this program. This article will explain what the Loan Modification Program tries to do, what are the facts and figures of the last year and why the program is not working.

The Loan Modification Program was created by the Obama administration in 2008. The idea was to help out homeowners that were having trouble paying their mortgages to modify their loans to more affordable monthly payments.

The program aimed to reduce the payments by three main methods:

a)      Reducing the interest rate of the mortgages to as low as 3%.

b)      If reducing the interest is not enough then banks could extend the tenure or term of the loan to 40 years.

c)       If that didn’t solve the problem then the lender would be encouraged to reduce the principal amount of the loan.

If you ask me that sounds pretty good, reducing interest rates, lowering the principal of the loan, even extending the tenure of a loan is acceptable if it stops you from losing your home. The idea was also that banks and lenders would benefit from this program because it would be cheaper for them to modify the loan than the alternative, foreclosure. Foreclosures are expensive for lenders and a loan modification that allowed an otherwise delinquent borrower to faithfully pay his mortgage does make sense.

Fewer foreclosures would stabilize communities, stop prices from dropping and save entire neighborhoods from slowly dying.

Unfortunately none of the above is actually working. Or is it? The Loan Modification Program did meet its short term goal of 500,000 trial loan modifications some months ago. That does sound kind of good, right?

However, of the 760,000 borrowers that have currently signed up only 31,000 have qualified for a permanent loan modification.

To illustrate, Bank of America, one of the U.S leading banks has only completed 98 loan modifications from the160,000 that have applied. That success rate is so low you need four decimal points to even see it on a calculator.

Why are things not working? Well for starters, borrowers are not paying their side of the bargain and often don’t make the three month trial payments. Banks also complain that although borrowers apply they do not fill in the necessary paperwork.

Of course the borrowers’ side is rather different, they claim they never speak twice with the same person and they are sent on a goose chase with conflicting and confusing instructions that are changed as the process goes along.

This brings us to the last reason loan modifications are not working, banks. Banks often simply don’t care if loan modifications happen or not because it is not worth their money. The incentives provided by the government are in many cases a joke compared to the losses involved in reducing interest rates and loan principals. Think like a bank. If you play along and help your clients to get a loan modification you might get $4,000 after 3 years. Great news. How does that compare with the tens of thousands of dollars you are going to lose in the long run? Exactly.

Related posts:

1. The Obama Loan Modification Aid Program, What Are The Benefits?
2. When is refinancing your mortgage not a good idea
3. Loan Modification Program Struggles Under Soaring Prime Loans.

Related posts:

1. The Obama Loan Modification Aid Program, What Are The Benefits?
2. When is refinancing your mortgage not a good idea
3. Loan Modification Program Struggles Under Soaring Prime Loans.

Half a million people are now in trial modifications under the Obama administration's mortgage rescue plan, but getting them permanent help is proving to be difficult.