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Here’s Why Loan Mods Don’t Work: Borrowers End Up With Higher Payments

Ever wonder why loan modifications haven’t become the silver bullet that would solve the foreclosure crisis? Via, USA Today explains in simple terms

Jul 31, 2020
Ever wonder why loan modifications haven’t become the silver bullet that would solve the foreclosure crisis? Via, USA Today explainsin simple terms a phenomenon TWI also has noted,when it comes to loan mods: Borrowers who can’t afford their mortgages and go looking for relief wind up with higher — not lower — payments.
Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.
Yep. There’s a big difference between writing down the loan balance on a house, and merely setting up an “extend and pretend” repayment plan. If you can’t afford the house now, you’re probably not going to be able to afford it later, especially with all the new fees added on.
The problem is the same one that has plagued loan modifications from the start: Lenders don’t want to write down loan balances. There’s no cramdown provision in bankruptcy court to force them to do so, thanks to opposition in Congress andinaction by the Obama administration.
Yet, as loan modifications fail to stem the foreclosure crisis, the government continues to offer financial incentives to servicers and calls them to Washington occasionally to give them a hard time about not doing more loan mods.
And in the end, here’s what we’re left with, according to USA Today:
“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.
The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.
If you’ve ever wondered why the foreclosure crisis doesn’t seem to be easing, despite the government’s vow to help homeowners, loan mods that actually increase a borrower’s monthly payment are an obvious reason why.
Camilo Wood

Camilo Wood

Camilo Wood has over two decades of experience as a writer and journalist, specializing in finance and economics. With a degree in Economics and a background in financial research and analysis, Camilo brings a wealth of knowledge and expertise to his writing. Throughout his career, Camilo has contributed to numerous publications, covering a wide range of topics such as global economic trends, investment strategies, and market analysis. His articles are recognized for their insightful analysis and clear explanations, making complex financial concepts accessible to readers. Camilo's experience includes working in roles related to financial reporting, analysis, and commentary, allowing him to provide readers with accurate and trustworthy information. His dedication to journalistic integrity and commitment to delivering high-quality content make him a trusted voice in the fields of finance and journalism.
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