Most Loan Modifications ‘Designed” To Fail

"Unqualified" homeowners are being offered mortgage loan modifications by their bank or mortgage lender that are ultimately designed to fail, in a slight of hand effort to offer token assistance to consumers who should never have received mortgage loans in the first place.

The mortgage industry estimates that over 60% of mortgage loans modified are likely to become delinquent less than 12 months after the loan modification is made. Given the fact that many of the mortgage loans modified today do very little to help homeowners in the first place, it is not a wonder why so many ‘modified' mortgage loans end up in foreclosure.

Although many ‘qualified' consumers are receiving favorably modified mortgage loan terms due in large part to sufficient monthly income and low debt to income ratios, many homeowners who have lost significant household income since first receiving their mortgage loan are being locked out of the loan modification process, otherwise seen as ‘unqualified'. Even the government sponsored mortgage loan bailout programs are disqualifying many of these homeowners simply because they would not otherwise qualify under regular government loan-underwriting guidelines.

Thousands of homeowners, whose mortgage loans have been identified as loans that should have never closed in the first place, are being targeted early on in the loan modification process, often suggesting that the homeowners should strongly consider selling their home or refinancing with another mortgage lender, rather than making a bad loan, better. Requests for loan modifications are given little consideration to these types of mortgage loans, with mortgage lenders offering nothing more than a ‘token' loan modification, one that does little if any good at all in making the monthly mortgage loan payments more affordable or making the mortgage itself more plausible over the life of the loan.

Simply put, banks and mortgage lenders who may have run afoul of traditional mortgage underwriting guidelines, offering high loan to value mortgage loans associated with high debt to income ratios, are simply wanting to keep in that in the past, keeping only those who can meet ‘current' underwriting guidelines, such as debt to income ratios of no more than 38%. Loan modifications for those homeowners receiving mortgage loans with debt to income ratios upwards of 60% of their gross income are finding the loan modification process to very difficult, especially if their current income has changed from when they first received their mortgage loan.

It is easy to tell a good loan modification from a token loan modification, simply by using the following formulas:

A good mortgage loan modification is one where your mortgage lender offers:

*Mortgage loan balance is reduced to that of the property's current value

*Convert an Adjustable Rate Mortgage (ARM) into a fixed rate interest loan

*Waive interest and escrow arrearages, including unpaid property taxes and hazard insurance

*A low good faith payment to reinstate a past due loan

A token mortgage loan modification where the mortgage lender offers:

*Add past due interest and/or escrow arrearages to the mortgage loan's current principal balance

*Setting a high interest ARM into a high interest fixed rate mortgage loan

*Increasing a mortgage loan's term from 30 years to as much as 40 years

*A high good faith payment to reinstate a past due loan, often times higher than what a homeowner can reasonably afford to pay at one time.

A good loan modification has improved loan delinquencies tremendously, where in opposition; the token mortgage loan modification has provided disastrous results, often leaving many of these same homeowners in the same quandary they were in even before the loan was modified!

Homes secured by ‘underwater' mortgage loans, that is, where the mortgage loan balance exceeds that of the home's current market value, are without a doubt a huge problem for consumers and industry alike. Consumers who have suffered financial setbacks such as a job loss or a loss of income, and continue to pay a mortgage loan that is taking a larger portion of their household income that an ordinary would never approve of, should strongly consider their options, including the sale of their home. Although the option of refinancing a mortgage loan is an option, applicants must still qualify for financing and may have difficulty if their current lender will not consider them to a good risk.

Although homes secured by underwater mortgage loans will likely not sell in a buyer's market such as the down market we are currently experiencing nationwide, a home could sell as a short sale, with many banks and lenders who originally offered a token mortgage loan modification, more than willing to accept a short sale followed by the subsequent debt forgiveness for the remaining principal mortgage loan balance.

The short sale of a home, when properly coordinated, allows the homeowner the potential benefit of full debt forgiveness by their mortgage lender as well as reduced income tax exposure. As always, seek competent, professional advice when seeking answers to questions regarding these specific areas.

The quicker a homeowner accepts the fact that an unaffordable mortgage loan is best resolved by a short sale, the quicker they can re-establish their good standing and purchase another home another home in the near future, secured by a mortgage loan that is affordable and no longer underwater.

For FREE information regarding the benefits of short selling your home, please contact your real estate professional or call (941) 206-6000.

Mike Sikorski, MBA, GRI

Licensed Real Estate Broker

Licensed Mortgage Broker

MLS of Florida Realty Corp.

22079 Kimble Avenue

Port Charlotte, Florida 33952

Phone (941) 206-6000

Email: Mike@FloridaRealty.net