Why Loan Modifications Are A Waste Of Time & Energy
Trying to Get A Loan Modification Is An Exercise in Frustration & Misplaced Hope
Many financially distressed homeowners and investment property owners who are facing foreclosure put all their hope in getting a loan modification from their bank or mortgage company. Unfortunately, as this McSweeney’s article – Could It Be That the Best Chance to Save a Young Family From Foreclosure is a 28-Year-Old Pakistani American Playright-slash-Attorney who Learned Bankruptcy Law on the Internet? depicts, the loan modification application process can be exhausting, time consuming, frustrating and expensive.
In this article the financially distressed borrowers had to wait over 14 months and spend thousands of dollars in attorney fees just to get their loan modification which which was a re-write of their mortgage loan to 40 years at a lower than current market interest rate for the next 5 years or so with an adjustable rate that is capped after that. While this helps the borrowers in the short term, it will hurt them badly in the long term. For starters, the borrowers are still heavily underwater (i.e. upside down) on their house and will likely remain so for over 10 years. In addition to that, the modified payments are not usually reported as normal payments on a credit report. Therefore, the borrowers will likely have their credit damaged slightly each and every month due to the reduced payment. In 10 years these borrowers will find themselves still unable to sell and due to the damaged credit probably unable to buy. If they had just accepted the reality that they cannot afford the house they could have sold their house via a short sale without paying a bunch of attorney fees and much faster than 14+ months. The end result would be that in 3-4 years their credit would be almost fully restored and they would be able to qualify for a new mortgage and buy another house at a much lower price. This is the much more financially sound strategy. While I fully understand that home ownership has it advantages and comes with strong emotions, I highly recommend that if you are facing default or a mortgage foreclosure that you put away your emotional thinking cap and put on your logical thinking cap since that is the one that will help you solve your housing and mortgage problems with a short sale rather than just push it into the future with a loan modification.