Friday, December 5, 2014

The Unique Potential of Loan Modifications


With foreclosures plaguing the mortgage industry and a softening real estate market making it virtually impossible for homeowners with their backs to the wall to quickly unload properties they can no longer afford, there is a new foreclosure avoidance tool making the rounds. Termed a loan modification, this tool allows lenders to alter the terms of the mortgage agreement between them and borrower and it may quite possibly usher in an end to the mortgage debacle.

To qualify for a loan mod, a property must be on the brink of foreclosure. The borrower needs to qualify for the program and the most commonly requested proof includes something that justifies an alteration of the loan terms and a reasonable likelihood that this process will result in a loan the borrower intends to pay off as stipulated. Borrowers wanting to take advantage of this tool must be employed, have verifiable income, and need to demonstrate that a sudden and unexpected change in their income resulted in an inability to repay the mortgage at the terms they initially negotiated.

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Lenders recognize the unique potential of this in that they turn bad debts into potentially acceptable loans that will yield profit for the banks. Even if the borrower decides to eventually refinance the loan or sell the property, the bank still wins because fees, late charges, outstanding interest and principal as well as any ancillary debts must be part of the modification agreement. This ensures that the bank is not going to lose any of the outstanding funds.

Furthermore, since bad debts always reflect poorly on a bank's overall appeal with investors and the FDIC, the fact that potential foreclosures that are ultimately considered bad debts are changed into potentially advantageous fiscal accounts is sure to have had a significant impact on the banks' willingness to give this a try. An additional aspect that most banks appreciate is foregoing the foreclosure process that more often than not jeopardizes the worth of the real estate the loan secured.

Since empty homes are prime targets for vandalism, banks routinely seek to sell them before they even make it to auction. In spite of their best efforts, properties do not sell as quickly now and damage to various pieces of real estate greatly diminishes the funds a bank collects in the wake of a foreclosure. Add to this the problem associated with the entire real estate process - after all, banks are in the process of making money, not selling real property - and it only makes sense that banks favorloan modifications as opposed to the tried and faulty practice of foreclosure.


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