Why Loan Mods Aren't Working

Real Estate Agent with Intero Real Estate Services, San Jose, Silicon Valley 01505493

For a long time many homeowners who are distressed have been trying unsuccessfully
to get their banks to allow them to modify their loans. Why are most of their attempts
unsuccessful? Below are some of the reasons:

  • These are non-performing loans that the banks would rather not have on their books.
    (yes, they have been holding onto many properties, and not even placing notice of defaults,
    but that will be changing).
  • Approximately 2/3 of homeowners who are granted a loan modification wind up
    defaulting during or immediately after the 3 month trial period.
  • Homes are not appraising for market value, so the homeowner's loan is usually for
    much higher.
  • If the bank thinks they will make more money by selling the home now, a loan mod
    is not feasible to them.
  • The banks loss will be 40% on REOs, vs. 20% on short sales. If the bank grants the
    homeowner a loan mod and they default on it, the homeowner will no longer fall into
    the debt forgiveness category as the loan is now a recourse loan.

There are other reasons why the banks are not granting loan mods, but these are some
valid ones.

Posted by

Lisa Wiseman


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Barb Van Stensel
Chicago, IL

There is a 3 month trial loan modification period because of the volume that the banks are holding on default loans.  Some homeowners default because the bank doesn't give them directions to continue and so they don't make the payments because they don't know where to send them.  A good portion don't qualify but what most don't know is that banks make more money in foreclosure then selling them as a short sale.  The reason being is that most banks have been bought out at lets say 55% of the original loan amount.  But the Feds are insuring the full loan amount!  And so, the bank gets paid for the legal fees, the full loan amount even though they purchsed it at 55% of it's note value, and hence, the banks are making money through foreclosure and the citizens of this country are paying for it as well.  It is sad. 

Mar 13, 2010 06:30 AM #1
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