Loan Modification: Bringing Homeowners Closer to Foreclosure

Many homeowners facing foreclosure are given a false sense of hope by loan modification. In many cases, loan modification can actually bring homeowners closer to foreclosure by draining the last of their savings.

Loan Modification to Prevent Foreclosure

Many American homeowners are facing foreclosure and wondering how to alleviate the financial and emotional stress they feel because of it. The Obama administration has recognized that this problem may require a government solution. The recent launch of the Home Affordable Modification Program (HAMP) was supposed to alleviate this financial strain on homeowners by helping them obtain loan modifications.

A loan modification is supposed to temporarily reduce a homeowner’s mortgage payments in order to prevent the property from going into foreclosure. Homeowners who have lost a portion of their income may try to obtain a permanent loan modification. It sounds simple: reduce the monthly mortgage payment to make the property more affordable. However, loan modification is far from a saving grace for many homeowners.

Temporary Loan Modification

Some homeowners who want to prevent foreclosure are granted a temporary loan modification from their lender. The temporary loan modification is essentially a trial period where the lender further considers a permanent loan modification. When the trial period ends, homeowners who are denied a permanent modification will have to pay their lender past due mortgage payments for the time the temporary loan modification was in place.  If the homeowner cannot produce the cash, the house will be taken in foreclosure.

Homeowners desperate to avoid foreclosure often spend all of their savings during this temporary modification peroid. Without savings, it is more difficult to recover after a foreclosure.

Permanent Loan Modification

Permanent modification provides little more help to struggling homeowners. To begin with, a permanent loan modification only lasts for a total of five years. Only homeowners who are truly suffering from a temporary financial hardship will benefit from a five year mortgage reduction. In addition, loan modification does not reduce the principle balance on the loan. Instead, the modification merely extends the length of the loan (extending a 30 year loan into a 40 year loan in some cases).

Finally, a homeowner who is granted a loan modification must pay arrearages, or back owed payments to the lender from the time the loan modification was in place. So all the money that the homeowner “saved” during the five year loan modification must be payed back to the lender with interest. In essence, a loan modification forces the homeowner to pay more money in the long run.

Closer to Foreclosure

Whether temporary or permanent, loan modification often gives homeowners a false sense of hope. Loan modification is only beneficial to homeowners who temporarily need a break from their mortgage. Only homeowners who anticipate being able to pay more later will benefit from a loan modification. Lenders often take the last of a desperate homeowner's savings through loan modification, bringing them closer to foreclosure.


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Carla Ghosn
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Autumn Quarters
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Sam Montana
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