Loan Modification Will Protect Home Values

This week we’ve decided to write about an issue that has many of us scratching our heads. When it comes to the real estate market right now one thing is very true, low prices and low interest rates have never made it a better time to buy. Some markets have actually started to turn around. Phoenix, AZ and South Florida, have reported a significant increase in sales. 

Many of these sales are most likely due to the high foreclosure rate which continues to saturate our market with inventory, thus bringing prices down. If foreclosures were to stall and loan modification mandated by the government, then we may have a chance to move more property and preserve home values.

Massachusetts Attorney General Martha Coakley has filed legislation to require lendors to work with struggling homeowners who are current, modify their loans and prevent foreclosure. This law would apply only to homeowners who need to modify their risky interest only, adjustable mortgages or teaser rate mortgages. Homeowners would modify their loans to a more financially palatable product, thus preventing an unnecessary foreclosure.

In 2008, 12,430 homeowners lost their properties due to foreclosure. This was a 62% increase from 2007.

But how do banks feel about loan modification? We called two large lendors to find out what their policy is for homeowners who are struggling, yet current on their loans.

Let’s take Countrywide Home Mortgage and Indymac Bank. Giants in the industry, who were saved from demise themselves last year, have it in their control to save homeowners from going under.

Both banks have the following plan: Don’t pay your mortgage for three months then they’ll talk to you. Until then, they won’t work with you, period. Indymac does have an online form that can be completed in order to put you on a waiting list, just in case you default.

Here’s the problem. Honest, hardworking mortgagors, who are now victims of the recession, are trying to make good. The inability of these banks to effectively address this large demographic, will only lead to more foreclosures and further deterioration of the real estate market and will ultimately further impact the failed economy.

Attorney General Coakley adds that "Loan modifications stabilize the marketplace, stop the escalation of foreclosures, and ensure cash flow so that mortgage and mortgage-backed investments can again be valued,"

With refinancing difficult for some consumers, modification may be their only choice. It is just good business to work with loan modification when the average foreclosure costs a bank roughly $50,000. When a consumer’s credit is already negatively impacted, their level of motivation to work with a bank and prevent foreclosure is dramatically different than when they have something to save. 

It will be interesting to see what the outcome will be of the Attorney General’s efforts.