The Utter Failure Of Loan Modifications
After getting off a call with our consultant (who happens to be a former loss mitigator for a major bank) he issued a blast stating “Why do ALL loan modifications fail?”
Even for us who have been in the distressed property trenches, that statement seems pretty harsh. But is it true?
His theory remains that the true reality that both homeowners and real estate agents need to understand is that when ANY paperwork is completed for a short sale there is a 99% chance that there will either be a short sale or a foreclosure.
He explains that excluding the 1% that hit the lottery and the homeowner gets a full rewrite or recast or even possibly an equity reduction on their existing loan terms; the reality is that they won’t.
It comes down to basic math.
If 99% of loan modifications do not convert to full new loans, why then do the banks keep pushing for them, why do agents help homeowners and why do homeowners want them?
Banks want information and money, while agents want to help homeowners and homeowners want to stay in their homes.
Our consultant mentions some possible outcomes:
Two, 5 or 10 year adjustment of terms and rate – This scenario remains the best case when requesting a new loan modification. The horrifying reality is that even if the homeowner makes every single payment they will eventually hit the end of the term. 99% of these loans will not modify for a second time and all the homeowner has actually done is delay the inevitable sale of their home. To qualify for the longer term adjustment depends on the original loan. Basically the better the original loan the better the offer on the loan modification. A loan modification will always meet an end to its terms. Further it will correct the delinquent payments on their credit and in most cases becomes a short term fix for a long term problem need a very real solution.
Trial loan modifications – Like a snowballs chance in hell, the possibility exists for a trial loan modification becoming a short term loan modification. However the stats for a homeowner not making payments even on trial loan modifications remain staggering. The numbers show that if a homeowner receives a trial loan modification, a 90% chance exists that the loan will go back in default (missed payment).
So the current market has created the band aid effect to get us through an election period and hopes that the economy and employment will magically all turn around.
Homeowners try to toss a hail marry passes to get to stay in their home and the banks/government are freezing the sale of REOs in an attempt to inflate home prices.
Our man of infinite wisdom and theories pushes this basic thought: Write it off, take the loss and move on.