The Trouble With Mortgage Loan Modification

In some cases, mortgage loan modification only postpones the inevitable. Rather than helping you afford your mortgage payments, a modification can put your monthly loan payments out of reach and leading you to foreclosure anyway.

What Is Loan Modification?

Once you’ve become 2-4 months behind on your mortgage, you likely qualify for mortgage loan modification with your lender. If you’re approved for loan modification, your lender freezes your interest rate for a period of time to keep it from continuing to adjust upward. Then, your delinquent payments are added into your loan balance and your payments are recalculated. The loan is reset and you’re no longer behind. You continue to pay your loan off at the new terms.

How Can Loan Modification Hurt?

In some cases, interest rates don’t decrease with a modified loan, meaning your monthly payments would remain the same. However, once your delinquent amount is added back into the loan and your payments are recalculated, you end up with a higher monthly payment. You ward off foreclosure in the near future, but unless you increase your income, your mortgage payments remain unaffordable.

Choosing a Good Modification

Don’t make a loan modification decision based on desperation. Before you agree to a loan modification, make sure you understand how it will impact your monthly payments. If your payments are going to go up, ask your lender about other options.

Negotiate a lower interest rate as part of your modification terms. Unless your interest rate goes down, your monthly mortgage payments will remain the same or even increase. Sure, you avoid foreclosure for a little while, but without lower payments, the risk remains. You can also ask your lender to waive some of the late fees charged on your missed payments.


Get foreclosure-prevention counseling from a local consumer credit counseling. Advocates can sometimes help you negotiate better terms with your mortgage lender.

Some Struggling Homeowners Will Keep Homes for the Holidays

Freddie Mac and Fannie Mae, two of the nation’s largest mortgage finance companies, have announced they will be halting foreclosure actions for a combined 16,000 households during the holidays. They’ll be taking a break from foreclosure sales from November 26 until January 9.
The two companies will spend the holidays figuring out whether mortgage borrowers qualify for a newly announced loan modification program. The program would help Freddie and Fannie struggling homeowners who are at least three months late on their mortgage payments, have not filed for bankruptcy, and still occupy the home secured by the mortgage. The program only benefits Freddie and Fannie borrowers.

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According to Fannie Mae’s press release, the mortgages would be made affordable through a combination of efforts: reducing the interest rate, extending the loan, or deferring some principle payments. Qualifying borrowers would see their payments fall to 38% of their gross income or less. The program is scheduled to launch on December 15, 2008.
Fannie Mae and Freddie Mac borrowers who have foreclosures scheduled between November 26 and January 9 will be contacted by one of the companies’ foreclosure attorneys. If the foreclosure-scheduled homes are unoccupied, foreclosure will proceed.