When Loan Modifications become Dangerous

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When faced with foreclosure, the first thing most homeowners will do is to call their lender in hopes of obtaining a loan modification. The vast majority of people would like to remain in their home if at all possible, and a loan modification is usually the only way that this can be achieved.

For a very select group of people, loan mods are the answer to their problems. For most however, putting your faith in the success of a loan modification can cause serious problems.

Here are some depressing facts:

  1. More than 98% of loan modifications are still in the “Trial Period”
  2. Right now, less than 2% of loan modifications have been accepted as permanent modifications by lenders.
  3. In 2009 only 66,465 of the 3 Million mortgages in foreclosure were permanently modified.
  4. And here’s the most disturbing fact of all. Nationwide, only 4764 “Permanent Modifications” actually have a 9 month history of successful payments.

Just to put this in perspective, according to ForeclosureRadar.com, as of today, there are currently 47,316 homes in foreclosure in Los Angeles County alone. There are about 4 million households across the country who need help. And in the face of millions of struggling homeowners all across the nation only 4764 people were actually granted permanent modifications. This means that when all is said and done, you have about a .01% chance of success when attempting a permanent, long-term modification.

These pitiful results make it clear that homeowners betting on a loan modification coming through are betting on very poor odds indeed. Even if the bank does make some sort of concession, it is likely that it simply won’t be good enough to allow you to stay in your home indefinitely. This is significant beyond itself, and can in fact be quite dangerous to homeowners, particularly those with equity in their homes to lose.

Let’s look at the following example:

Benjamin Homeowner hasn’t been able to make a payment on his mortgage for 90 days. The bank has sent him a Notice of Default, and now that the threat of foreclosure has become a reality, he knows that something must be done. He fully realizes that he can no longer pay the $250,000 mortgage on his home valued at $500,000.

The obvious strategy is for him to sell the home, collect $250,000 minus various costs, and fees, and move on with his life. Benjamin, however has lived in this home for almost 20 years, and really doesn’t want to move. He is also worried that due to his poor credit, finding a new place to live might be a possibility. He has heard about the banks modifying loans for people, and wants to see if this might be a possibility.