Loan modifications have been fading in and out of favor since the idea was floated that the federal government could pick up a portion of the tab for lenders being willing to grant them. modification is a change to the terms of the mortgage to reduce the principal, forgive some interest, or drop the interest rate. Basically, anything that changes the terms of the original note. Banks have been slow to grant them, for reasons that have been detailed here and here on this blog (there are some really good posts on this topic). Now there’s more bad news. For those attempting to get a modification, and even for those lucky few that have been successful.
First, the majority of those attempting to get a modification are seeing related negative items appear on their credit. Our office has an endless parade of people that have been making exactly the payment dictated by the lender in the trial period, complete with back-up documentation for multiple months. They have never missed a payment or been even 10 days late. And yet, their credit shows a long string of 30-, 60-, and 90- day late payments on their mortgage. In other words, the lender negotiated a trial payment, then began marking the borrower late when those payments were made. Can this be sorted out? Probably. Is it a massive headache, and a potential catastrophe? You bet it is. The borrower is often legally in foreclosure. At the point where the lender believes that foreclosing will be financially beneficial they can do so that very weekend.
Now the lender actually has an additional incentive to drag its collective feet in taking care of the modification. Now 23 states have a de facto foreclosure moratorium, lenders may start taking even longer to grant the official contractual modification, because they will now need a large increase in staff in the foreclosure and loss-mitigation departments to meet the increased burden of proof in handling judicial foreclosures. That staff is going to come from the modification department, not the underwriting department or the unemployment line. Reduced staffing = more delays. Get used to it.
But if you get through the process and actually get the modification, you’re out of the woods, right? Wrong.
Suppose you get the modification taken care of. Your job changes and you get a better offer somewhere else. You’re next step is to get pre-approved for a new loan for a home at your new location. You’re denied. Why? Because your current lender has reported on your credit that you have obtained a modification. Once a new lender sees it, your loan is dead. Most lenders have issued credit overlays for mortgage modifications that treat them as pre-foreclosures, and require 48 months from the date of the modification before a new loan is eligible.
Right. A notice of default and a modification have the same credit impact from a refinance or a purchase standpoint. Should you get a modification, you better stay in that house, with that loan, for four years. (Or have a wheelbarrowful of cash).
Personally, I think contractual modifications are a great idea. Commercial loans have been almost infinitely modifiable for centuries. Circumstances change, and if the parties to the contract want to alter the original terms of the agreement, why shouldn’t they be able to? But the way things have turned out with the wave of modification attempts in the residential markets, it might have been better for everyone if the concept never existed at all.