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.
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