Loan Modifications Are Simply A Source of Revenue for Banks

I will admit that I had high hopes for the loan modification programs touted over the past 24 months or so. In theory and on paper, a loan modification makes perfect sense. Circumstances in the homeowner/borrower's life have changed to the point where the existing mortgage payment is unaffordable. All too often these days the reason is a job loss or underemployment (working part-time instead of full-time). Small businesses as well as large corporations are shedding positions across the country. Or it may be that the homeowner went through a divorce or lost their spouse or significant other.

In the majority of situations that I run into, the homeowner still has some source of income to work with. If the monthly payment could be adjusted to accommodate their income, it would be a win-win for all sides. The banks would fewer foreclosures to liquidate and the homeowners would remain in their home. The local tax base would remain intact and neighborhoods would not depreciate in value because of the neglected foreclosed properties.

But the loan modification has turned into a source of revenue for many of the banks and lenders. What happens time and time again is that the lenders allow homeowners to enter into "temporary" modification agreements while the homeowner's file is supposed "reviewed". Anybody who has been in the real estate game over the past few years know that these banks and lenders do not even touch a file for months at a time much less do a timely review. Then after the homeowner has been operating in good faith and making these reduced payments, the banks and lenders come back and tell the homeowner they have been denied for the modification and the reduced payments were essentially "in error" and not sufficient. Now the banks and lenders want anywhere from 6-18 months of the difference in the "real" payment and the modification payment, plus late fees, accrued interest and all kinds of other nonsense.

Now the homeowner is facing foreclosure because they acted in good faith by not only making the modified payments but also in paying their taxes which funded the bank bailouts. When the homeowner cannot come up with this lump sum and still cannot afford the original payment that they requested help with, the banks and lenders foreclose on them. The beauty for the banks and lenders in all of this is that the homeowner's balance is now sky high, much more than when they originally started the whole modification process. The banks and lenders then go to the private mortgage insurance companies and the government (HUD and/or VA) for reimbursement on these defaulted loans. You can't tell me that the banks and lenders are not getting a higher mortgage balance reimbursement on these loans with all of these added bogus late fees and penalties and such. Or better yet, the banks and lenders foreclose on the homeowner and then sell the uncollected/charged-off balance to a collection agency who hounds the broken homeowner for the next ten years. Either way, the bank is making money off these higher balances on the backs of the homeowners.

So the average homeowner who is seeking a modification needs to beware that it is likely that 9/10 people will get turned down EVENTUALLY for the modification. But it is what happens to the loan balance in the meantime and after foreclosure where the banks and lenders are creating revenue at the homeowner's expense.