Loan modifications seem like a great solution for lenders and borrowers. If you can’t afford your payments, then stretch out that loan and make lower payments rather than saddling a lender with one more property in the REO- and foreclosure-property tsunami. However, in reality, a recent congressional oversight panel report indicates that even when loan modifications appear to be “economically rational,” lenders simply are not making the mods. According to the report, there are some practical – and initially overlooked – problems with the concept that make lenders loathe to modify loans unless they are faced with public pressure or other incentives.
For starters, lenders have to recognize modifications as immediate losses on their balance sheets – and balance sheets are not an area of great flexibility for lenders right now. If a lender does not modify a loan, they have some discretion about when they post the loss on the property. Loan mods post as losses immediately and at the beginning of the trial period. Given that the overwhelming majority of attempted modifications fail, non-performing loans are actually better for banks’ books!
Additionally, lenders face unclear court rulings when it comes to how modified loans “place” in lien priority. In fact, second loans have the potential to supersede the first depending on how principal balances, missed payments and fees line up. Because lenders cannot be sure what they stand to lose, modifications look less than appealing. Particularly when you factor in that there really are not a lot of incentives for lenders to participate in HAMP or any other loan modification program, it’s actually pretty easy to see why loan mods are not that attractive to lenders in general.
It is possible this could change if foreclosure becomes less of an option in the wake of the recent Massachusetts Supreme Court foreclosure ruling on Wells Fargo and US Bancorp. Do you think that loan modifications should be more of a priority for lenders?
Thank you for reading! Your comments and questions are welcome below.