Man versus Bank: Loan modifications

Loan Modification Leverage, Who Has It

When doing a loan modification one must realize that there is something called leverage and either you have it or your lender has it. It’s very cut and dry, you have it or you don’t. Leverage in regards to a loan modification comes down to is it in the best interest of the lender to modify your mortgage or would they rather foreclose if given the opportunity and sell your home at prices dictated by the current real estate market.  Just like any business decision a company is going to lean towards what is best for the company and ultimately what will make them more money.  Money, isn’t that what it always comes down to for a company?  How to keep more of it or how to make more of it.

The leverage that a homeowner has depends on the mortgage market where they live.  I live in Las Vegas, NV and currently one in seven houses has been foreclosed on and is sitting vacant.  Obviously, the borrowers in this city have leverage over their lenders who can’t handle the housing inventory that they have.  Las Vegas, is the worst city for foreclosures in the country and lenders will try anything to not foreclose.  Typically people in this city can quit making payments for over two years before getting foreclosed on.  The reason why the lenders haven’t foreclosed is because the lenders already have a high inventory of homes that they are trying to sell and they need to sell those first before adding to the inventory.  The lenders know that the longer they wait on selling, the more time they’ll have for the market to correct itself.  You can bet when the amount of homes for sale lowers to reasonable inventories, lenders will begin foreclosing on those people who haven’t been paying their mortgage.  Until then, lenders will let the homeowners stay in their homes for extended periods without making payments as a way for the lenders to get free upkeep on the home until they foreclose.

Fannie Mae and Freddie Mac are the two largest lenders and they service none of their own loans. They use service companies who are in charge of collecting payments, paying taxes, paying insurance, foreclosures and harassing people who are late on their mortgage payments. Loan servicers make a percentage of every payment that they collect from homeowners.  When people quit making payments, servicers are no longer collecting payments but generally have to keep making those principal and interest payments to their lenders.  This gets expensive so either they foreclose or they try to modify the mortgages to more affordable terms for their customers.  Before Helping Families Save Their Homes Act of 2009 (S.896) was passed, loan servicing companies didn’t want to modify mortgages because they were fearful of lawsuits from their lenders.  This Helping Families Save Their Homes Act enabled loan servicers to modify mortgages without being sued by their lenders.  Now all of the sudden, it makes more since for loan servicing companies to modify mortgages instead of paying the high fees of foreclosure.  When loans are modified, loan servicers collect lower fees because the mortgage payments are reduced; however, collecting something is better than nothing and they don’t have to pay the high price of foreclosure.

Foreclosure will typically occur when a homeowner has equity in the home and less likely to occur if a person is upside down or has no equity and they quit making mortgage payments. Above all, foreclosure will be inevitable unless a homeowner pursues a loan modification in either case.  If a person owes $100,000 on a house that will appraise for $200,000, the lender will most likely foreclose on the home if given the opportunity because the $100,000 difference is enough to cover the foreclosure expenses and make a profit.  Now if the loan is for $200,000 and the home is worth $100,000, the lender would rather modify the home because foreclosure would give them a huge loss.

In any situation, a homeowner should pursue a home loan modification.  Under the Making Home Affordable loan modification program, a home owner can fill out a three page application for the opportunity to lower their mortgage payments and it won’t cost them anything.

This article is the seventh of a Do-It-Yourself approach to home loan modifications. Check back often or subscribe to this site to stay tuned for the next article in this series (a new post will come out each week day for a month), designed to help you complete a loan modification on your own, cutting out the middle man, helping you protect your ability to stay in your home for the best price possible, and helping you lower your payments as much as possible. After all, nobody will look out for you as well as you can look out for yourself.

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