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Loan Modifications II Other Reasons Banks will not Modify

By
Real Estate Attorney with http://www.medicalandspaconsulting.com

Another primary reason that lenders will not modify loans is that lenders have to recognize modifications immediately as losses on their balance sheets. Unfortunately, balance sheets are not an area of great flexibility for lenders at this time. If a lender does not modify a loan, they have some discretion about when they post the loss on the property. Loan modifications post as losses immediately and at the beginning of the trial period. Given that the overwhelming majority of attempted modifications fail (approximately 2/3), non-performing loans are actually better for banks’ books!

Additionally, lenders face unclear court rulings when it comes to how modified loans “place” in lien priority. In fact, second loans have the potential to supersede the first depending on how principal balances, missed payments and fees line up. Because lenders cannot be sure what they stand to lose, modifications look less than appealing. Particularly when you factor in that there really are not a lot of incentives for lenders to participate in HAMP or any other loan modification program, it’s actually pretty easy to see why loan mods are not that attractive to lenders in general.

 

Comments (7)

Will Handley
Progressive Inspection Service - San Juan Capistrano, CA
Certified Master Inspection Services

I've yet to hear of or speak to a single owner, agent or lender who has first hand knowledge of an actual principal loan balance modification.  Occasionally you hear of a lower payment loan modification with fees, interest and of course the reduced payment loaded onto the backside of the modified loan. 

Jan 15, 2011 05:02 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Is this true only for principal reductions or for payment and interest rate changes as well?

Jan 15, 2011 05:12 PM
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Great information to get out there.  The public feels that there is a disincentive on the part of lenders to give loan modifications and it's good to give an explanation of possible reasons why they are not granting them very easily. 

Jan 15, 2011 05:30 PM
Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

This is great info. to have as we are discussing the loan mods with our friends, clients and relatives.

Jan 15, 2011 05:35 PM
Lisa Walston
Atlas Property Group and Abbey Church Properties - Greenwood, IN

Thanks for the information. I've wondered why the banks would not modify. You've given a plausable explanation.

Jan 15, 2011 06:10 PM
Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

Paddy, this is a superb post. Too bad it's members only. I'd love to do a re-blog!

Jan 18, 2011 05:20 PM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Either way - people who aren't paying their house payment are pushing their money into the economy so non-performing notes aren't necessarily a bad thing. 

I do believe that lienholders do want to turn non-performing assets into performing assets unless mortgage insurance is involved.  It just depends to what extent they are willing to bend over backwards.

Jan 27, 2011 02:45 AM