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Loan Modifications Short Guide To Success Part 1 ? The Problems

By Andrew

Obama?s loan modification program can be seen as a failure, if you focus on the millions upon millions that are benefiting, or as a modest success with over 650,000 borrowers on trials and 375,000 on the fast track to getting permanent modifications by January 2010.

As reported earlier the government is in the process of sending special task forces to win over, bully or cajole, depending on your point of view, the big lenders that decide how well the loan modification program goes.

The big question is why are loan modifications not working better with all the money, over $75 billion, being thrown at it. This article will look at some of the main problems that are creating the loan modification minefield borrowers are currently suffering.

Problem 1. Lack of information

Government firms like Freddie and Fannie are contracting the services of outside companies to go house to house providing accurate information on how to go about getting a loan modification.

This is a reply to lenders complaining that the main reason loan modifications are slow is that borrowers are really bad at filling in forms and providing the information required. Of course, the media is littered with counterexamples of model borrowers that provided all the information and battled with the conflicting instructions that lenders requested.

Problem 2. There is a lot of people that need Loan Modifications.

Around 7.5 million households in the U.S alone are delinquent on their mortgage payments. 25 percent of all borrowers are underwater in their mortgage, owning a home that is worth less than what the mortgage is worth.

Those figures are huge, to deal just with the paperwork, information and mechanics of dealing with so many people on a subject that so few of us understand is a big job that even if all the players wanted Loan Modifications to work it would be hard to do faster.

Problem 3. Banks are nearly as lost as the rest of us.

The simple truth is that even when lenders want to modify a loan it is not a smooth road because they are not used to dealing with this volume of modifications. Banks are already understaffed due to the recession and their mitigation departments are in no better shape. Add to this under-information about government programs, lost paperwork, changing fax and telephone numbers and you start to see why it is so difficult to process a loan modification.

Problem 4.The NPV test

The NPV test stands for Net present value. This test compares the money a loan is likely to generate if it is modified (and the borrower keeps the house and pays the mortgage at the modified rate) and what it is likely to generate if the modification is not carried out. The logic behind this test is not bad. Making loan modifications a profitable exercise for banks is good news, if you make it profitable your chances of making it happen grow exponentially.

However the actual formula to calculate the Net present value is according to many commentators unrealistic and allows lenders to shelve loans they should modify.

Problem 4. Banks often benefit from delinquency.

Banks often are not the actual lenders behind a loan but take on the job of loan servicers. Loan servicers collect payments and deal with borrowers but don?t own the mortgage. Loan servicers profit from delinquent borrowers and the late fees and higher interest rates they generate.

Many go as far as saying the loan modification trials are simply a trap loan servicers use to get three more monthly payments from borrowers that are beyond help and would not pay otherwise.

The problems that borrowers face when trying to work out their loan modification are pretty scary, our next post will deal on how we can face these problems and increase our chances of loan modification success.

Related posts:

1. Loan Modifications Short Guide To Success Part 2 ? The Guide
2. Loan modification success reported by OCWEN, others not so confident
3. Loan Modifications No Match For Rising US Foreclosures.

Related posts:

1. Loan Modifications Short Guide To Success Part 2 ? The Guide
2. Loan modification success reported by OCWEN, others not so confident
3. Loan Modifications No Match For Rising US Foreclosures.

Full post as published by Blown Mortgage on December 09, 2009 (boomark / email).