How Does a Loan Modification Work and Who Owns the Mortgage?
A mortgage modification changes the terms of an existing mortgage, typically so the mortgage payments will be lower and the borrower can afford to remain in the home. In addition to the federal government's loan modification program, private lenders throughout the nation offer modifications to their mortgage holders about to go into default status. During difficult economic times, the number of modification applications increases.
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Eligibility
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Mortgage modification programs are only available to property owners in danger of going into default status or already in default status on their home. The premise is that the lender does not want to foreclose on a large number of homes and then have to deal with auctioning them, if modifying the loans can keep people afloat until financial circumstances improve. You typically have to request a loan modification, as lenders rarely contact borrowers to offer them.
Decision
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In most cases, the decision about whether or not to allow a modification is made by an independent company hired by a lender or a group of lenders. The decisions are made entirely on a case-by-case basis, depending on whether the modification will be cost effective to the lender. If the lender will save money by allowing and financing a modification, the modification is generally approved. If the lender will save more money by foreclosing, the modification request is usually denied.
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Borrower's Responsibilities
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The application process is long and can be frustrating. You will be required to submit many pages of documentation proving your income, assets, debts and plans. In many cases, you will be asked to resubmit paperwork that you already sent in. Experts at Bankrate.com suggest you practice patience and do everything asked of you, as it will be to your benefit if it gets the modification approved. You must prove your property's value, your inability to make the current payments and a detailed explanation of exactly what you can afford to pay each month.
Equity Issues
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According to MortgageProfessor.com, the more equity you have in the property, the less likely it is that your modification request will be approved. It is more cost effective for lenders to foreclose on properties that are almost paid off. Homes with little equity and large balances, however, are not cost effective for the lender to take back. If you have enough equity in the home to pay deferred interest and all foreclosure costs, the lender is more likely to foreclose.
Ownership
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The original owner of your mortgage remains the owner following the modification, however, if your modification is insured through a third party, such as the federal government, you may have a lien placed on the property to secure the party's interest.
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References
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