Foreclosures cost lenders and homeowners money. Homeowners lose not only their homes, but the equity built up on their homes. Lenders then face the task of dealing with short sales in order to recoup the loss of their investment. One way to avoid foreclosure is for homeowners to receive help from the lender in the form of loan modifications. Since the first nine months of 2011, approximately 70 percent of homeowners who received loan modifications have remained upto date on their mortgage payments. Attorney John Rao of the National Consumer Law Center (a non-profit organization based in Boston) said recently that this percentage shows people want to honor their debt and stay in their homes with the help of lenders.
Loan modifications come in many forms. A lender may reduce the interest rate, give term extensions, defer principal, or issue debt reductions. It was once rare for lenders to consider loan modifications, but since the housing bubble burst and the mortgage crisis of recent years, lenders are more motivated to help homeowners avoid foreclosure, in the absence of other options. An example of willingness to work with homeowners is a couple in the Boston area who were having trouble meeting their mortgage payments after the husband lost his job. With the help of their lender, who cut the interest to 3%, the couple can now make their payments and stay in their home.
In Boston, homeowners who have received loan modifications from their lenders have had their payments lowered an average of 20% according to report by Federal Reserve Bank of Boston. Loan modifications do have their challenges. Some lenders may be reluctant to issue them, and Freddie Mac and Fannie Mae prohibit any reduction of principal. This stems from a concern that more homeowners will be motivated to default on their loans. Some homeowners have complained that lenders ask for forms over and over and try to drag out the process. But the majority of lenders do show a willingness to work with homeowners in an effort to avoid foreclosure.
A federal program, the Making Home Affordable Program, is an effort by the current administration to stabilize the housing market, and help avoid foreclosure. There are several programs to help homeowners who find themselves unable to afford their mortgages. Some homeowners have had their mortgage payments cut in half using this program. The Making Home Affordable Program has plans to help unemployed homeowners, or homeowners who find themselves upside down in their loans, and to help manage a second mortgage and make payments more affordable.
Homeowners who find themselves in danger of losing their homes because they are struggling to make their mortgage payments do have options. And a loan modification isn’t always the best option. Sometimes, creative refinance programs are available and can be much easier to obtain than a loan modification. Communication with the lender is one of the most effective tools in staying in a home when trouble is perceived. Instead of just letting the home go back to thebank, so to speak, homeowners should ask their lender about solutions. It may be a chance to not only stay in the home, but to lower monthly payments in order to do so.