What is a loan modification?
A loan
modification is an agreement between a lender and a
borrower to change the original terms of a loan in order
to payments more affordable.
Loan modifications can be accomplished through a
variety of methods. The interest rate on a loan can be
temporarily or permanently reduced. An adjustable interest rate
can be changed to a fixed interest rate. The term of a loan can
be extended from the standard 30 years to 40 years. In some
cases the principal balance owed a mortgage may be reduced. One
or more of these methods can be used to reduce the monthly
payment for the borrower.
Modifying loans is becoming
increasingly common as the declining housing market and
struggling economy take their toll on homeowners. Lenders are
beginning to see the benefit of loan modiciation which can
result in relatively smaller losses than foreclosure. Borrowers
have a clear benefit to seek loan modification since a lower
monthly payment can help them keep their home.
Recently there has been political pressure for loan
servicers to implement widespread programs to review and modify
troubled loans. The Federal Deposit Insurance Corporation, the
agency that insures most bank deposits recently proposed a plan
which provides incentives for servicers implement systematic
and sustainable processes for modification of loans at risk of
default. Through conservatorship of IndyMac Bank, the FDIC has
already started carrying out such a program.
Loan modification is still a relatively new
arena. Many lenders have not definied clear criteria about
which loans will qualify for a loan modification, and process
for obtaining a modification may be similarly unclear. The
government has not taken a clear stance on whether they will
support or subsidize a widespread program. Perhaps most
importantly, the long term impacts of widespread modifications
on the banking industry, broader economy, and real estate
markets will not be known for years.
Related Questions:
Why would a lender modify my loan?
What is needed to apply for a loan modification?
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