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Loan Modification

Loan modifications have become a popular alternative to a short sale or foreclosure. In a recent statement by the FDIC Chairman Sheila C. Bair, she advocates "a systematic and streamlined approach to loan modification to put borrowers into long-term, sustainable mortgages." The hope, according to FDIC officials is that this program will become an industry model. Foreclosures continue to rise and more adjustable rate mortgages (ARMs) resets are pending in bank portfolios. This, combined with declining home values and tightening credit standards, and you'll see why there is continued pressure of the government on banks to consider loan modifications. As banks continue to post losses due to foreclosure, they are becoming more open to loan modifications, and there is a definite need for it for troubled borrowers. There are many that don't qualify for the two Federal Housing Administration (FHA) foreclosure bailouts (FHASecure and HOPE for Homeowners) because those programs are only for holders of subprime ARMs.

FDIC's Push for Loan Modification

The problem is that there are also an increasing number of foreclosures due to job loss. Places left and right are laying people in the thousands. When they lose their incomes, many times they also can't pay their mortgages. And, even those who have subprime loans still may not qualify for the FHA bailout programs because they are too upside down on their loans. FHA requires at least 3% equity, and many in the high-cost areas don't have enough equity. Loan modification could very well be the only hope for these people, and that generates leads for lenders. The current circumstances are why loan modifications are now being called "the new mortgage refinance," and that may be the best strategy for offsetting losses from the lack of origination and refinance opportunities.

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