It sounds as if it’s a good idea.
If you are a loan servicer and some of your borrowers are having trouble making a payment on their mortgage loans, why not try to work out a deal? It costs less than going through all the steps necessary to foreclose on their homes, right?
Well, maybe.
The investors holding onto the notes on those loans may want you to foreclose right away.
Why?
When borrowers can’t keep up, lenders typically consider whether it makes sense to offer a loan modification. Such workout deals, known as “mods,” often involve lowering the interest rate or stretching out the term.
Investors holding mortgage-backed bonds are watching nervously because mods may not always be in their best interest … Generally, investors favor mods that ease a normally reliable borrower through a rough patch, but not those that merely buy time for deadbeats …
… Credit Suisse analysts recently examined loans that had been modified over the past few years by one nationwide lender and found that borrowers missed at least one monthly payment after a mod in nearly 40% of the cases. (That failure rate may have been skewed upward by victims of Hurricane Katrina who never returned to their homes.)
Basically, in case you just skimmed all that, what it says is that as many as 40% of those granted reprisals on their loan payments once or twice, ended up defaulting on their loans, regardless.
Many people who enter foreclosure do so because of illness, job loss, or other life-changing event.
These events aren’t usually solved just by forgiving one month’s loan payment.
Steps to Modify Loans and Avert Foreclosures Draw Controversy – By Lingling Wei, Ruth Simon and James R. Hagerty, The Wall Street Journal
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