The amortized loan modification trap

Loan modifications offered under the HAMP program are amortized which cause a great many home owners who are hoping for relief through the program to be disappointed.  Many currently have interest only loans and offering to convert the loan to an amortized loan does not help them because now they have to make monthly payments to pay off principal which means that the potential savings from a reduced interest rate are eaten up at least in part by paying towards reducing the principal.  While the lenders can forbear a portion of the principal (i.e., borrower does not pay interest on a portion of the unpaid principal) and have the borrower pay interest on only a lower principal amount, there are limits to how much they will forbear (please note, we are not talking about a principal reduction). 

I have a client who is trying to figure out whether to try for a loan modification or short sale and we went over the loan modification numbers and it's clear that he can't benefit from a loan modification because the lender would have to forbear more than what's allowed to make it work even with a 40-year loan term.  To boot, even if a borrower were to pay 40 years (or whatever is left on the new 40-year loan term when the loan modification take effect), the borrower still has a hefty balloon payment at the end (the amount of the principal on which he did not pay interest).  Loan modifications really rarely provide meaningful short-term or long-term relief under HAMP.  My client was able to get a loan modification a few years ago (pre-HAMP) and the loan modification was for a fixed interest-only loan for 5 years and he was surprised to learn that the new loan modification under the HAMP program would be at least a partially amortized loan.  After paying 432 monthly payments, he would still owe about $150,000 on a $550,000 loan. By the way, the loan would be amortized over 432 months instead of 480 because he is already 4 years into the loan and making his 30-year loan into a 40-year loan, leaves him with 36 years = 432 months.