Demystifying The Loan Modification Process

With so many loan modifications, modification programs, foreclosures and short sales these days, a little rumor control is mandatory. The loan mod industry is rife with hucksters, con artists and rumors. Still, there are more insidious myths being told that have some claim on the truth. Here are a few:

Principle reduction loan modifications are common

Absolutely not. Principle reduction takes the most from the bank’s profit. More importantly, if principal reduction were commonplace, it would swiftly cripple the entire banking system. Unfortunately, banks want you to keep your underwater homes and toxic assets.

In circumstances where a homeowner is in financial trouble and has a second mortgage they cannot make the payments on, the principle may be reduced on the second loan only.

This is even less common on first mortgages, and usually occurs when legal proceedings are imminent because banks engaged in unlawful lending practices.

Lenders are  willing to enter negotiations

Lenders are not particularly interested in working with the government or borrowers towards loan modification.

In truth, lenders, too, are hurting from the glut of toxic assets on their books. However, they are only interested in government backed loan modification programs insofar as they restore the wavering financial system and increase profitability.

Many financial experts are taught game theory in school, and for good reason. Basically, game theory holds that individuals and institutions are self-interested, rational actors who will ‘game’ the system in order to glean the most benefits. Banks are not altruistic institutions, and it is important to understand that they will forestall the loan modification process if they can get a marginally better deal.