FrontDoor's Home Finance and Home Value Guide

Controlling Great Expectations: What To Expect From Loan Modification

We have all heard that mortgage banks do not want to foreclose on homes, which has created the expectation that loan modification requests will be viewed favorably by lenders as a homeowner's good faith effort to avoid foreclosure. The reality is a lot more complicated than simply asking for and receiving easier mortgage terms.

In the current market climate, most struggling homeowners are looking for two things: a lower monthly payment and the holy grail of loan modification -- principal reduction. Principal reduction is when a lender agrees to simply forgive some part of the mortgage loan balance. This is an enticing prospect to owners who are "upside down" -- owing significantly more than their homes are worth on today's market.

Though many loan modification services swear that they can get borrowers' balances reduced, this may be a real estate fairy tale. The New York Times recently reported that only about 1.3 percent of all successful loan modifications include a reduction of principal. There is virtually no incentive for a mortgage lender to agree to principal reduction, as it locks in their losses from the down market and allows you to reap 100 percent of the benefits when the market recovers.

While homeowners may be on an unrealistic mission to have their principal balances reduced, a lender's sole goal for agreeing to modify a loan is to make the loan affordable on a long-term basis, so that the delinquent borrower will get and stay current on their mortgage payments. Additionally, there is evidence that over 50 percent of mortgages that are modified end up in default again! As such, lenders tend not to modify mortgages in cases where the borrower cannot prove they will be able to make the modified payment.

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