Another Try for Mortgage Modification

by Dan Krell, © 2009

As more and more home owners default on their mortgages, something must be done to soften the blow of the foreclosure tsunami facing America. Mortgage modification is one form of home owner assistance that has been attempted since the beginning of the recent crisis. As there are strict criteria for such assistance, it is clear that not all home owners can be helped by a mortgage modification.

A mortgage modification is when a mortgage servicer or lender changes the terms of a mortgage, usually to make repayment easier for the home owner. A modification may be in the form of a lower payment through an interest rate adjustment, lengthening the mortgage term, or both. Home owners who are at-risk of foreclosure will typically have their arrearages added to the principal and/or added to their monthly payment.

Although there are numerous media reports of loan services and lenders making mortgage modifications available to at-risk home owners, the results of voluntary mortgage modification attempts have been mixed. Many home owners’ requests for mortgage modifications from their mortgage servicers/lenders fell on deaf ears. Some home owners who were successful in modifying their mortgage found that their monthly payment increased when arrearages were applied to the new terms; and there are reports of home owners who are delinquent even after successfully modifying their mortgages.

The reason why mortgage modifications as whole have not been widely successful thus far is because of the complexity of the relationship of those involved. A majority of the mortgages that are at-risk are securitized instruments which have many investors (thousands in many cases), to which the servicers and lenders have a fiduciary responsibility. In order for the loan to be modified and meet their fiduciary roles, the servicer/lender would have to have all investors for each mortgage agree to the new terms. In many cases, the servicers and lenders are walking a tightrope balancing between mortgage losses and investor law suits.

Government efforts to make mortgage modifications available to home owners who meet criteria set by HOPE for Homeowners have not been successful, as reported by the National Association of Consumer Bankruptcy Attorneys (NACBA.com). In a December 2008 report, the NACBA stated that the HOPE for Homeowners modification program had a total of 312 applications and no modified mortgages. Additionally, the NACBA reported statistics that indicate voluntary mortgage modification has not benefited homeowners and advocates for judicial mortgage modification (also known as court supervised modification).

Critics voice dissention to judicial mortgage modification and government subsidized mortgage modifications citing concerns that these programs will not only fail to significantly lower foreclosure rates, but will have unintended affects as well. In addition to pointing out that majority of mortgages are not subject to modification (due to deaths, divorce, among other reasons), critics state mortgage interest rates will rise to cover future potential losses from these mortgage modification programs.

Home owners, mortgage servicers and lenders, as well as Wall Street investors are awaiting (with great anticipation) the details of new foreclosure prevention programs unveiled by the Obama Administration. It is unclear what effects the new mortgage modification programs will have on foreclosure rates and mortgage interest rates; however it is clear that modification programs will be only one feature of a total recovery plan.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 16, 2009. Copyright © 2009 Dan Krell.