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Loan modifications are all the rage in government and the media, but where the rubber meets the road they may not be getting it done. It seems that very few of these troubled loans are actually getting modified and when they do they simple seem to be delaying an inevitable foreclosure.
Loan Modification Doesn’t Mean Debt Forgiveness
Although there are many statistics showing the powerful effect of debt forgiveness in recovering troubled borrowers few loan modification programs are using this tool. Holden Lewis’ article on FrontDoor.com confirms this fact:
“Less than one in 50 mortgage modifications includes debt forgiveness, which is considered the surest way to prevent foreclosure.”
“For every troubled homeowner whose mortgage principal is reduced in a modification, 39 others end up with more housing debt as lenders tack on missed payments, late charges and even attorney fees to the loan balance.”
But would that strategy help?
“A number of researchers found that the most successful mortgage modifications involve debt forgiveness. Yet, according to the Comptroller of the Currency and the Office of Thrift Supervision, just 1.8 percent of modifications in the first quarter of 2009 forgave debt. That’s about one in 50 modifications.”
“The other 49 modifications consisted of rate reductions or rate freezes, term extensions and “capitalization,” which means that the missed payments and fees were added to the homeowner’s debt burden. Some 70.2 percent of modifications included capitalization: That means that for every troubled borrower who got debt forgiveness, 39 ended up owing more.”
Looks like a big disconnect to me and why there are so many consumers willing to take a chance on using the services of a loan modification firm. These consumers have usually tried repeatedly on their own to see what relief their bank or government programs could offer them and have been left out in the cold. As usual since America’s founding, if you want results look to the private sector.
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