Mortgage modification can be defined as a process in which one of the parameters of a mortgage loan is changed in favor of the borrower. This could involve lowering the interest rate, extending the loan term or even decreasing the principal value. Other modifications include forgiveness of late fees, penalties or payments.
If a person falls behind on his mortgage payments, he runs the risk of loosing his home, because this is the basic idea of mortgage loans - failure to cover the monthly repayments results in having the home repossessed by the mortgage company. From a strictly material and financial point of view, this is the worst thing that could happen to a family, but the truth is it has been happening a lot lately.
The frantic pace at which mortgage companies were foreclosing reached disturbing figures in the last several months. Here is a quick stat for you - no less than 1,081,395 homes have been lost to foreclosure since August 2007. Only for the month of January, 2009, 66,777 homes were repossessed by lenders, which is 18% higher than January 2008.
Mortgage Modification To The Rescue
Mortgage modification is one of the tools on which the Bush administration relied upon in order to help borrowers and decrease the number of foreclosures, but there were absolutely no funds committed to this cause. Right now, Obama has pledged to spend over $50 billion to help troubled borrowers by subsidizing their mortgage payments. The details of this plan haven't been released yet, but the idea is to make lenders more open to mortgage modifications without having them take a loss, because by decreasing the number of foreclosures, house prices will stabilize and of course, more people will remain in their homes.
Mortgage modification is a solution which is beneficial for both lenders and home owners. There are some very strong reasons to back this statement and we will focus on them in the lines bellow.
Benefits For Borrowers
The benefits that mortgage modification holds for homeowners are more than a few and include:
- Unaffected Credit Score - inability to repay a mortgage results in drastic decrease of the borrower's credit score. Bad credit score means that future loans will most likely be declined or they will be associated with extremely high interest rates. A mortgage modification on the other hand, gives this borrower the opportunity to make things right and repay his mortgage to the fullest, which will actually improve his credit score.
- Avoiding Foreclosure - having your home foreclosed is the worst that can happen, because not only will your family be left on the street, but you also loose all the money that you have been paying so far on the mortgage.
- Avoiding Legal Proceedings - the legal proceedings that follow a foreclosure are long, costly, stressful, and embarrassing at times.
- Families Get To Remain In Their Homes And Neighborhoods - relocating is definitely not a pleasant activity, especially once the entire family has just settled down at the current place. It's also a very difficult process for the kids too, because they have to change schools, find new friends, so it surely won't be a nice surprise for them.
Benefits For Lenders
Some might find it hard to believe that mortgage modification can possess advantages for lending companies as oppose to foreclosing the home, yet here they are:
- Higher Profit - housing prices continue to decrease all across the country and they have now reached record low levels. Since 2006, homes have lost between 30-50% of their value, which ultimately means that for the lender, foreclosing will result in making less profit, because the price of the respective estate is now much lower than the initial estimate made upon signing the mortgage agreement. So for example, instead of receiving $500,000 from a borrower in the long run until he pays the entire mortgage, at the current market prices, the mortgage company can sell the respective home for as much as $300,000.
- Stabilizing The Housing Market - having less foreclosures will help stabilize the housing market which will result in prices going up again in the future.
- Foreclosure Costs Money And Time - a fact that shouldn't be overlooked is that foreclosures cost lenders time and money. The court case is long and it can last over a year. On top of that, in today's market it costs the lender anywhere between $20,000 - $50,000 to foreclose.
Conclusion
As you can see, financially troubled homeowners aren't the only ones that benefit from a mortgage modification. Lenders also have their fair share of reasons why they would agree on renegotiating the terms and conditions, so it's of best interest for both sides of the deal to have a sit-down and try finding a way of avoiding foreclosure. What you have to remember as a borrower, is that the current state of the economy puts you in a very strong position to request a mortgage modification, and as long as you can prove your financial struggles combined with ability to make the payments under the new terms, it's highly likely that your application will be approved.
