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In a home loan market that is ripe with foreclosures and one that is seeing lending institutions go under faster than you can say fried bananas, many borrowers stuck in high interest home loans are seeking a way out through home loan modification. The banks, on the other side of coin, are apt to offer loan modification until the last hour, mostly due to the fact that many lenders see loan modification as a way of staving off a foreclosure, but not preventing it; they feel that if they modify the loan it will only delay the inevitable and the borrower will still default at a later time.
What is loan modification and how does it work? A loan modification is exactly what it sounds like: a lender and a borrower agree to restructure the entire loan contract between them. This generally involves the lender offering the borrower a significant reduction in their interest rate, more favorable repayment terms and sometimes even modifying the length of the loan so the borrower can have longer to repay the loan and can enjoy a lower monthly payment that will prevent them from experiencing a foreclosure. Modifying a loan can sometimes be forced by the government as in the case with the Indy Mac fallout—where the government has stepped in and will be modifying as many as 25,000 plagued home loans to help the borrowers get back on their feet and avoid a foreclosure.
Why are so many borrowers seeking loan modification? Many borrowers who are stuck in higher interest loans that are costing them far more out of pocket than they can afford. Meanwhile the value of their homes have depreciated to below what they currently owe on their homes, and as a result they are seeking loan modification to try and lower their interest rate and monthly payment to make better sense of the whole situation. Truly, loan modification is nearly always a borrower's last resort to avoid a foreclosure. Many borrowers who are in home loans where they owe more than their homes are worth will seek loan modification because if they can get a lower interest rate than it will be more worthwhile for them to stay in the home and avoid a foreclosure.
Will most banks offer loan modification? While many banks are not fond of loan modification, most will ultimately offer it to borrowers who are struggling, but getting your lender to that point can be fairly difficult. Because a bank offering loan modification has to agree to new terms, a new contract and a lower interest rate, many lenders view this aspect as an absolute last resort for a borrower who is nearing foreclosure. And still, many may decline—even at the borrowers request—to modify a loan because they may factor the losses that they will incur from modifying the loan to what losses they may suffer is they follow through with the foreclosure process.
In the end getting loan modification can save your home from a foreclosure and secure your credit rating. However, actually being able to get your lender to the point of agreeing to modify your loan may be real headache that results in nothing but fruitless efforts. Nonetheless, for borrowers who have few other options, save perhaps a short sale on their home—where the lenders loses nearly as much money as with a foreclosure—it may be in the lenders better interest to modify the loan. But most lenders will only do so if they feel that their losses will be less than if they were to simply repossess the home and sell again to staunch the financial blood flow.
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