A Good Loan Modification Program Decreases the Chance of a Foreclosure

Loan modification services are beginning to work as evidenced by declining re-default rates. During the 2nd quarter of 2009 there were 142,362 mortgages receiving a loan modification. Of the loans modified during the second quarter, 78.2 percent reduced payments, 4.3 percent left payments unchanged, and 17.4 percent increased payments. This is a shift away from the trend in 2008, when the vast majority of those loans receiving a loan modification either did not change or increased monthly payments.

Core Facts

A loan modification program can increase monthly payments when loan modification services insist on capitalizing past due interest, advances for taxes or insurance, and other fees to the balances and then re-amortize the new balances over the remaining life of the loans. Although the interest rate and / or maturity date of the loan might be changed the changes may not be enough to offset the increased new unpaid principle balance.
In the past, the effort to Modify Mortgage Loans that increased payments were made less often and tended to mitigate losses effectively. As our economy declines this approach can carry added risk, hence the new found penchant for strict verification procedures. It's painful to watch the same lenders and loan modification services that were able to modify mortgage loans from application to closing within a few short days, now delay for months while they claim to be "reviewing" the file.
Lower payments can make loans more affordable and more likely to be sustainable over time. To successfully modify mortgage loans reduce payments when a loan modification program chooses to lower interest rates, extend the amortization period, or forgive or defer principal. The lower payments also cause lower monthly cash flows to the investor. This is part of the decision making process when the lender is evaluating whether a loan modification is a viable alternative to foreclosure.
The HAMP is a loan modification program geared towards providing greater flexibility to structure a more effective loan modification. A loan modification that lowers payments outperforms those not modified. Costly studies come up with a common sense conclusions and this is one those cases. Millions of dollars have been spent to determine whether or not lowering payments will curb the rate of re-defaults on a loan modification. The most recent report by the OCC at Treasury has shown that a loan modification program that decreased monthly payments have consistently lower re-defaulted rates. Although lower payments reduce the cash flows to investors, they result in long term sustainability of the mortgage payments.
After 12 months, only 34.1 percent of permanent modifications that decreased monthly payments by 20 percent or more were seriously delinquent. Alternatively, 63.4 percent of modifications that left payments unchanged and 64.7 percent of modifications that increased payments were seriously delinquent after 12 months. The report shows clearly that lowering payments by 20% or more drastically reduces re-default rates.
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