Although many have experienced a relief in their monthly payments after their mortgage loan was modified, some say that it has made things even worse for them. They end up having larger debt on their homes and pay a higher monthly payment. Apparently, mortgage lenders roll late fees, back taxes and other kinds of taxes into the principal to a point that for some it is now even impossible to make payment, not just ‘difficult’. This is the one reason, apparently, that many modified mortgage loans are sliding back into default.

Currently there are 360,165 mortgage modifications in the US that are in a 3-month trial period under the Obama administration’s $75 billion stimulus package. The program focuses mainly on reducing the interest rates and not the principal. However, the most effective modification that could actually help homeowners avoid defaulting a second time is cutting down the principal and not the interest rates.

Even though some may find payment relief now, this relief may only last for the first few years but then payments will go up again. In general, usually lenders only focus on today and not the future. Although they seem to be helping homeowners, the main focus of lenders is not on permanent debt reduction and that is also true for the plan under Obama’s administration.

According to CreditSights and ICP, about 660,000 mortgages was modified this year. A huge percentage of 90% of those borrowers have seen their overall principal balance larger after the modification.

Over 80% of loan modifications are usually leading to lower monthly payments for borrowers which mostly involve rate reductions or loan term extension and not forgiving principal. Forgiving the principal of the loan is the last resort in mortgage modification. The reason being is that lenders gain more profit financially by keeping the value of the loan and not reducing the principal or not modifying any loans at all.

Some lenders even do not want to be bothered to modify mortgages that are worth more than the value of the home itself. Many of these homeowners who are underwater deliberately walk away after the lender spent money and time renegotiating the loan with them. Homeowners who walk away pretend that they want the modification although they can actually afford payments. When they have the modification, they will still walk away. By doing this, they stay in their homes for 3-4 months for free.

Recently a study by the Federal Reserva Bank of Boston suggest that the government change its focus from providing mortgage help to financial help for those who lost their jobs. One strategy to do so is by giving grants to individual homeowners for a year or two to help them go through the most difficult times in order for them not to lose their homes. In fact, some lenders like Bank America is occasionally offering temporary mortgage forgiveness for a few months to those who lost their jobs. Hopefully mortgage forgiveness program such as this can be initiated by the government nationwide.

Popularity: 1% [?]