Mortgage Modification Problems
When the economy turns sour, many people begin having trouble paying their bills. If they fall behind on their mortgage payments, the situation could lead to delinquency and then foreclosure. They could pursue a new mortgage with another lender that is less costly, or they could ask their current lenders for a modification of their existing mortgage to reduce their payments. While that avenue is less costly because the fees are greatly reduced, the borrower may find problems when he tries this approach.
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Mortgages Sold
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The biggest reason why mortgage modification may not be possible is that the majority of mortgage lenders recoup their outlays by reselling the mortgages, often immediately after they are executed. Since they no longer own the mortgages, they are not authorized to make any changes to them. You can suggest that they obtain that approval but, in most cases, your mortgage was bundled with many others before itw was sold, and identifying the buyer of that mortgage may not be possible.
Lender Reluctance
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Let's say that you fall behind on your mortgage payments and the bank is ready to foreclose on your home. With profits as its main goal, your bank may decide to proceed with foreclosure rather that modify your mortgage because it will make more money doing so. This is particularly true if you have built substantial equity in your home. The bank will recover more of its money by selling it than modifying your loan.
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Underwater Homes
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A requirement for mortgage modification is that your home be worth at least as much as you owe on it. There are times when real estate values plummet and your home is said to be "underwater." In such a case, your only avenue is refinancing your mortgage. Since your lender is familiar with your credit history, it may reduce the cost of refinancing.
Second Mortgages
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During the run-up in housing values in the early 2000s, many people took out second mortgages so they could tap into the additional cash. Second mortgages are made at a higher interest and must be repaid in fewer years than first mortgages, so the monthly payments are high. Unfortunately, a modification of a second mortgage is not possible.
Public Opinion
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A fundamental reason why there are problems with modification of many mortgages is the commonly held belief that many people bought more house than they could afford; and when they suffer financial reverses, they want others to bail them out. This opinion not only pervades the banks but the federal government, as well. For that reason, both have been slow in coming to the aid of people who are in financial trouble and would benefit from mortgage modification.
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References
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