When it comes to avoiding foreclosure, a loan modification is one the of best solutions for most homeowners. Why? Because they are the least risky for the homeowner and allow them to keep their home. However, recent reports show that principal reduction modifications may be more risky than originally thought.
Modifying Terms and Conditions
The main goal behind a mortgage modification is to change the terms and conditions associated with the loan, in order to make the monthly payments more manageable for the homeowner. Most modifications involve lowering the interest rate, temporarily suspending payments, extending the life of the loan or reducing the principal amount owed on the loan. Until now, it was thought that all modifications were equally successful in boosting the homeowner’s chances of staying out of default.
A report released by Credit Suisse shows that reducing principal mortgage balances can have a detrimental effect on borrowers, especially those who are owe more than the home is worth. Since it was reported that nearly 11 million homes are considered to be “underwater” one strategy has been to alleviate the discrepancy by having lenders forgive the difference in what is owed and what the home is worth. However, the data shows that close to 40 percent of borrowers who had their part of their loans forgiven in this way defaulted again within 12 months, compared to 27 percent who completed other modification types.