Do mortgage modifications really help or just delay the inevitable?

I recently heard from a family that has been facing foreclosure, and they finally received the bank’s offer for modification.

While the monthly payment was greatly reduced and is manageable, it took multiple phone calls to the bank, HUD and the mom working up her own amortization schedule to attempt to understand the implications.

The loan would now span more than 40 years and seems to almost double what they originally owed (interest for a longer loan). Even if the housing market improves and they tried to sell the house later, they don’t think they could pay off the debt. (An accountant friend of mine says they would just need to refinance again in five to 10 years or when they were back on their feet and the loan amount would be greatly reduced by reducing the years. I’m still trying to understand it all.)

On the plus side for taking the modification: The family couldn’t rent a place any cheaper. It allows them to stay and get back on their feet. But when it’s time to move, they will either have to short sale or walk away and either way screw up their credit again.

Are families just better off getting out than saddling themselves with 40 years of debt that there’s no way they can ever pay off? Or do they just refinance again and reduce the years back to 20 when they can increase their payment?

Has a loan modification helped your family? Are they always set up where you can’t pay them off or do some help long-term? Is there ever really forgiveness in the modifications?

43 comments Add your comment

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Wes

June 14th, 2012
7:27 am

What you’re missing is that they are not tied into the lower payment that hardly reduces the principal. They can pay the 40-year loan amount now and until they are back on their feet, but then if they want to build up any equity in the home, they can increase their payment amount. Just because you have a 40-year mortgage doesn’t mean you have to take 40 years to pay it. It is true that they are going to be “upside down” on the mortgage until they obviously build up some equity, but this option provides them with the opportunity to do so. Walking away from a commitment is a cowardly alternative that some people are unwilling to take.

Wes

June 14th, 2012
7:30 am

BTW, you don’t have to refinance back to a 20 year note to pay it off in 20 years. All you do is pay more than the minimum amount! There are no closing costs that way. I have a 30-year mortgage that I’m paying off in 11 years. I just make double payments.

Parent

June 14th, 2012
7:52 am

“Do mortgage modifications really help or just delay the inevitable?”

It depends upon the reason for foreclosure. My wife and I lost our home to forclosure two years ago because we could not keep up with the payments after she lost her job and our income decreased by a third. One month after the house was sold in foreclosure, she landed a part-time job. If the bank had been willing to modify our loan (even temporarily), we would have been fine after my wife fund another job.

I always wondered why the banks thought it was a better idea to foreclose and get 50% of the loan value, rather than renegotiate and get 80- 95% of the loan value.

Jeff

June 14th, 2012
8:01 am

The bottom line is; the housing market was way over priced and the correction was inevitable. When you flood any market with a product or service, prices fall. What no one ever seems to ask is were all of these people living beyond their means for years? Usually, the answer is yes. At some point, you have to pay the piper.

That being said, we recently had a huge mortgage “settlement” with the banks. Where did all of that money go? I’ll tell you where. The state governments took a chunk of it to pay for their budgets and it DID NOT go to the people it was intended to help. It was a shake down just like the tobacco settlement was in the 90’s.

Your friend is just going to have to suck it up. But Wes, above, is exactly right.

Tig

June 14th, 2012
8:05 am

I think it all depends on the situation and the people involved.

With us, I was laid off from work and it took me 20 months to land a new job. Per Bank of America guidelines, we were ineligible for a loan modification because I wasn’t working (even though I was receiving unemployment). Granted, they finally told me that after I had tried for over a year to get just the initial paperwork sent to me after being told that I initially qualified to be considered. The entire time I was laid off, we cut corners on other bills just to make sure that our mortgage got paid on time purely because we wanted to avoid foreclosure.

When I was finally employed again, I contacted Bank of America again about FINALLY starting the modification process. My husband and I ultimately wound up making the decision to sell our house via a short sale instead of a loan modification because we would not have had enough of the payment amount lessened to make it worth it. On top of that, the house that we had purchased for $174K in 2006 is now only worth $80K according to appraisers.

Now we’re renting an apartment that’s much closer to where I’m working (17 miles to work instead of the 40 from the house) and our rent is $600/month less than our mortgage was. In addition, I’m now only having to buy gas for my car once every 6 days instead of every 2 1/2 days, plus we’re now halfway between my parents and my husband’s so our daughter has a much better chance of seeing my side of the family more often :)

Tig

June 14th, 2012
8:15 am

Theresa – congrats to your friends for being able to get a modification.

It sounds like they were doing the smart thing and keeping contact with the bank and not avoiding the bank and just letting for the inevitable to happen.

If they do ever make the decision that they need to ultimately go the short sale route, if it’s any consolation, it’s not the black mark on credit that it used to be before the housing market collapsed. Sure it still dings you, but creditors are much more understanding these days when doing manual credit reviews than they used to be. :) [I've even heard the same being said about foreclosures because it's happening to 'everyday' people and not just ones intentionally bringing it about like it stereotypically used to be]

motherjanegoose

June 14th, 2012
8:40 am

I do not have the answer to this one as I have no personal experience.

Here is a question I have…our neighbors just paid off their mortgage. HOORAH for them. I am wondering if that is really prudent, as the loan rate is so low. If you can get an interest rate in the 3’s is it best to pay it off? I do not know. They are in their late 40’s. We owe less than half of our appraisal but I am not sure I would consider paying it off as our interest rate is in the 3’s. Anyone?

VoTech

June 14th, 2012
9:23 am

only pay off home loan at less than 4% IF all other credit cards and car loans etc. at higher rates are PAID OFF

Techmom

June 14th, 2012
9:31 am

Jeff, I agree there needed to be some correction but metro home values are now at the same value as they were in 1996. For a lot of people, that means their home is now worth less than what they bought it for if they purchased between 5 & 15 years ago. That’s more than a “correction”.

We bought our first house in 2000 & we couldn’t even sell it for what we owe on it! Literally we would have to take a $25-30k hit on it even after paying on it for all these years and making lots of upgrades Instead we are renting it b/c we were ready to move on but couldn’t sell. And the rent basically only covers the mortgage and HOA fees. Since it is not our primary residence, there is no hope for refinancing. We have been able to keep tenants and haven’t had to make too many mortgage payments out of pocket so we’ve kept it. But my husband and I have both agreed that if we ever get to the point where we can’t find a tenant for more than a couple of months, we’d just let the house go. We loved the house and neighborhood and don’t want to do that but at this point, it appears as though we’re going to be landlords for the next 10+ years and quite frankly, it’s a pain the butt!

I’ve know two people who were able to renegotiate their mortgage and it took them each almost 2 years to get it done. We are now sitting next door and across the street from two houses that their owners walked away from LAST JUNE. They both went on the market about 2 months ago and neither has sold. I can’t wonder if perhaps the mortgage company had been willing to negotiate if it would have been better for them to at least be getting SOMETHING. Instead they are paying the upkeep and taxes for a year. I don’t understand how that behooves them.

Don't be a fool/slave to the banks

June 14th, 2012
9:45 am

for you underwater people and those thinking about a modification. I received a modification and the effort wasn’t worth it. after the mod, I was paying 50 dollars less that the original payment. It was take or leave it. bills became unbearable and had to let it go.

Don’t worry about a credit score. even if you have a 750 score, credit is tight and you’ll have difficulty obtining credit. cash rules. Screw the banks like they screwed the american people. WALK AWAY.

for all the people who think that walking away from your mortgage is immoral; if you did your research thoroughly, you will come to understand that banks don’t lose. the homeowner loses. by walking away you lose less.

Parent

June 14th, 2012
9:47 am

Let me point out that it DOES NOT MATTER if the valuation of a house goes down by 50% as a result of the housing market collapose, IF the family is still able to make the payments. If a person is paying $2000 a month for their house, and their jobs do not change, they should still be able to pay $2000 per month. The only kicker is if their income changes or if they HAVE to sell their house (for example, if they are transferred as part of their job).

MANGLER

June 14th, 2012
10:01 am

An underlying dynamic that made home ownership part of the dream was job stability. Most people could count on keeping their job for many years and grow with their company and grow roots in their community while raising a family there. While that is still reality for many people, for a lot of younger families, as well as middle aged ones, can no longer count on work stability for 5, 10, or 20+ years at a company in one location.
I can afford a house again, but I seem to change companies or locations every couple of years now, so I really have no incentive to buy anything because I just don’t know that I will stay put long enough to build a life out of it.

motherjanegoose

June 14th, 2012
10:02 am

@ Techmom take a look at this article from yesterday, it was in the Gwinnett Paper:
http://www.gwinnettdailypost.com/news/2012/jun/12/foundation-gives-house-to-injured-vet/

We bought our first house in Texas in 1987. We then moved to ATL in 1989. We rented it out for 4 years and then sold it…barely breaking even. No fun having a rental property long distance but the market was not good and we just hung on until we could sell it.

Warrior Woman

June 14th, 2012
10:18 am

It should be no surprise that the total payments on the loan are greater if you take 40 years to pay off instead of 20 or 30 – that’s basic math. To avoid it, as others have said, just make extra payments to principal or refinance when the financial situation improves.

If the modification is an extension to 40 year term and a reduction in rate, it is almost certainly the government designed modification program, which takes a minimum of 4 months to set up (possibly much longer).

It sounds like your neighbors just want someone else to eat the loss in home value. I think it is unreasonable to expect that, since they clearly did not plan to give the lender part of the profit if the home value went up. There is rarely principal forgiveness in modifications for a number of reasons.

homeschooler

June 14th, 2012
10:18 am

@ MJG…about paying off the mortgage. Clark Howard says “no”. Dave Ramsey says “yes”. (depending on certain circumstances). I love Clark but Dave understands better how the average person thinks.
My husband and I were not like many people who bought our home in 1999. Maybe because he was self employed, maybe because we are not minorities but we simply could not qualify for any more than 125,000 for a home. Others I knew were getting 200,000 dollar loans. I was a bit jealous but we built our modest 3 bedroom 2 bath ranch and started our life. When we were able to upgrade a couple years later it was not a possibility because we built on family land and did not want to move. So we re-financed and got a 15 yr mortgage at 4.75 percent. Then the bottom fell out of the market. People were losing homes right and left and here we were only owing 70,000.
In 2009 we had saved quite a bit of money and were trying to decide if we wanted to invest it or if we wanted to pay off the house. We figured we would have a guaranteed 5 percent return on our money if we paid it off. Plus the peace of mind of owning our own home at age 38 and 40! We could have invested but the market was so bad we just didn’t want to take the chance that we could get as good of a return. Clark Howard would not have approved but I can’t tell you how good it feels to know that we will never have to worry about having a roof over our heads. Now I can put my kids in private school if I want to. I can easily save to pay cash for a car etc.. I am all for paying off a home if you can.
I am so thankful that the banks wouldn’t give us a higher loan and feel bad for those who fell into that trap.
In terms of Theresa’s questions. I think every situation is different. I think most people plan on paying a mortgage the rest of their lives anyway. To me the best thing to do in the situation presented is to stay put, pay the mortgage and hopefully refinance or pay extra when things are looking better. I don’t think everyone who walks away from a mortgage is a horrible person but I do think some give up to easily.
My advise to everyone who is starting out is to get a 15 yr mortgage on whatever you can afford to pay a 15 yr note on. Even if it is not your dream house, even if it is less house than your friends have or that you feel you can afford. And NEVER borrow against your house. You will not be sorry.

Sarah

June 14th, 2012
10:51 am

I have close friends who applied for a mortgage modification not because they had lost their jobs, but rather just because their market crashed and their home is now worth less. That was 3 years ago… and they have not been approved yet. Their “free advice” attorney advised them not to make any house payments until the bank makes their decision. They still live in the house even though they haven’t made a payment in 3 years. She says it’s as if no one has noticed they stopped paying. Initially they were saving those house payments for when the bank did approve the modification, but after the first year they stopped. Now they have the luxuary of a nice house with no payment and an extra $1,800 a month to spend on whatever they want. Makes me enterain the idea of doing the same thing.

motherjanegoose

June 14th, 2012
10:58 am

@homeschooler…I hear ya! We are frugal and bought this house on my husband’s income only. I am self employed. We had a 15 year with 7 1/2 years left. We went with a 10 for our refi as 7 1/2 is not available. We have 9 years left now. When our daughter is finished at UGA we will put her apt. money into our mortgage. I looked at the total outlay and it was less with a 3 3/4 at 10 years than a 5 3/8 at 7 1/2 years. We did not pay closing costs.

Regarding the topic yesterday…when kids grow up having a lot…it can be difficult for them to start out small. We had no TV, washer, dryer nor a dishwasher when we started out almost 30 years ago. That was just how we lived.

taxappealatlanta.com

June 14th, 2012
11:02 am

By the time they got the bank to modify their note, their credit was already pretty dinged up. I think they should have cut it loose now and gone elsewhere and rented. 40 years to finance a house! That is nuts. Clearly they have no business being in a home. The physical bricks and sticks will continue to depreciate every day. They will have to maintain the home…paint, roof, hvac, plumbing etc. Hopefully they are putting money away for replacement reserves, they are essentially making interest payments only and they are not building up any equity. The only saving grace is that they can deduct the interest on their taxes…but if it was me, I’d throw the keys on the counter and get on down the road and start rebuilding my credit immediately. There are many people who owe more than their home is worth and will be worth for years to come. So, it’s to each his own. That deal she described though doesn’t sound economically smart though.

Techmom

June 14th, 2012
11:05 am

Anyone just notice the headline “Ga. Students Make Strides in CRCT Scores” and immediately wonder how much cheating is still going on? These cheating scandals have really made me question any increases in standardized tests.

SA

June 14th, 2012
11:28 am

Yes they help. We modified our mortgage when my husband was unemployed for two years. Our other option was to send the keys to the bank. Since modification, we have not missed a payment. A win-win for us and the bank.

jarvis

June 14th, 2012
11:30 am

@Techmom, the difference doesn’t seem undoable to me. 6% more passed…or something like that. I think that doesn’t seem horribly unreasonable to an eye test.

Techmom

June 14th, 2012
11:39 am

@jarvis, I just read the article and you’re right 6% doesn’t seem that wild of an increase but the headline sure made it sound like there was something truly significant going on with the score increases. Unfortunately with all the APS cheating going on, my first thought was that there had to be some cheating going on. Sad.

whityiu

June 14th, 2012
12:27 pm

I agree that these big banks are criminals in their own rights, but doesn’t walking away from your home and mortgage mean you’re almost guaranteed to never get a mortgage again?

Once Again

June 14th, 2012
12:34 pm

Here are congressman Ron Paul’s incredibly accurate economic predictions about the housing bubble, foreclosures, etc. from way back in 2001!

http://www.youtube.com/watch?v=kFd8YluIVG4

Seriously, Obama or Romney have this kind of competence and sound educational foundation to help us through this economic crisis??

Kate

June 14th, 2012
1:01 pm

One key concept many people miss is that a 40-year (or 30, or 15) mortgage term does not require paying in exactly that time. The term creates a minimum payment schedule, but you’re free to pay extra against the principle monthly or annually, pay it all off at some point, or refinance in the future. A paid off house is a beautiful thing, especially going into retirement. IMO that should be the goal for most people. Rent only rises over time, while mortgage payments are both fixed and eventually end. So I don’t agree being a renter long term is a wise course.

If I needed the payment to be X amount created by a 40 year term just for a few years, so be it. It’s just a tool. It’s easy enough to pay extra once you can – even $100 a month makes a big difference. Small extra amounts applied to the principle reduce both the balance owed and the term quite dramatically, especially if made early (first 5-10 years) in the loan.

If I were in this person’s situation I would absolutely take the modification and stay put. No moving except for critical life changes like a job transfer. Pay extra on the principle as soon as finances improve, refinance later if there’s a better deal, and wait for the market to improve, which it will over 10-15 years. Doing this right, it’s highly likely they can sell down the road with positive equity, or even end up with a paid off home in far less than 40 years.

Tina

June 14th, 2012
1:37 pm

I’ve had 30 year mortgage with the same bank for 10 years now (BB&T) and have tried to get them to refi but all I’m getting is the run-a-round. One would think after making payments on time for that long and even maitaining them when my husband was layed off for 2 years, it would be an easy process. We got stuck in an 8% rate back in the day so it would be extremely beneficial for us to refi but they just find one reason after another not too or don’t even call me back. It’s more important to BB&T to make that extra grand a month of us than is to do what’s right by the customer.

motherjanegoose

June 14th, 2012
1:45 pm

@ Tina…you need to explore other options as you could well save hundreds each month, unless your credit is bad. You could probably get into a 15 year with a lower payment and knock 5 years off of your loan! Good luck!

justmy2cents

June 14th, 2012
1:47 pm

@TIna- try a credit union. I refinanced my house a few years ago to put my husband’s name on it too and got 3.25 on a 15 year via the credit union and the major banks couldn’t come close to touching that deal!

As for the story- I made sure when I bought my house (as a single parent) that I could afford it. It never crossed my mind to buy something out of my range. I could have used my VA loan up to about 440k (I think that was the limit), but stuck with under $150k.

Tina

June 14th, 2012
2:52 pm

Thanks guys and MJG, a 15 is not an option with the amount of our loan. Credit is okay but suffered for a year 7 years ago when we got an owner financed house back and had to delay a few cc payments in order to keep the house until it sold. Once sold, we slowly but surely caught them all up and paid off most now. Justmy2cents, can you believe BB&T told me to try a credit union as well? They would rather me take my loan away than to make it make more affordable. Crazy!

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camille

June 14th, 2012
9:48 pm

@ homeschooler.. I am not sure if I understand your statement “Maybe because he was self employed, maybe because we are not minorities but we simply could not qualify for any more than 125,000 for a home.” What does that have to do with anything??

I now a LOT of non-minority persons who have lost their homes. There are a lot of minorities who were min-informed about the process, but as another poster stated, a lot of people thought that the jobs they were in would be there forever.

The news seems to highlight minorities, but minorities make up 13% of the population and could not statistically make up the majoring of people who have lost their homes across the country.

homeschooler

June 15th, 2012
9:48 am

@ Camille. At the time we got our mortgage there were a lot of programs that allowed minorities and other groups to qualify for a higher amount. My sister-in-law was a realtor at the time and we followed the programs closely. There were minorities who were making 50, 000 dollars a year and were qualifying for 300,000 dollar houses. And btw the banks were forced by the government to provide these loans so I don’t blame the banks entirely. We made approximately 60,000 dollars a year which didn’t look like a lot but because my husband was self employed things like cell phones and some of our car insurance was paid by the business. My point is because he was self employed our income look like less than what we could actually afford. Anyway, we only qualified for 125,000. I never said more minorities are losing their homes but I do know that more minorities were given loans they couldn’t afford and I think that is a very sad thing. Just another way our government tries to “help” and ends up hurting people in the end.

Sarah

June 15th, 2012
2:14 pm

11 years ago, my husband and I bought our first house. We were both working and upwardly mobile and the bank offered us much more than we thought we could realistically pay so we only bought what we could afford. We settled on a 20 year old 150k house. I remember when the housing boom started to happen and all of these 500k + houses were popping up all around us. We couldn’t understand how so many people were able to afford such lavish houses. We actually thought we were doing something wrong!

In the end, doing the right thing served us well. We were able to recently sell our house at a decent price (not what we wanted but decent). Due to our not being greedy and purchasing what we could afford instead of what the bank offered us, we were able to comfortably make payments, build equity, and were able to walk away with a profit. That profit went toward the down payment on our much newer/much bigger house that we now live in. Plus with our good credit, we qualified for 3.5% interest rate. I take comfort in that doing the right thing worked well for us, but I have to say… I was pretty annoyed/jealous when I first saw all those giant mega mansions going up around me.

It makes me angry when I hear how so many people making 30k, 40k, or 50k thought they could realistically pay for a half a million dollar house. It’s absurd. And it absolutley infuriates me that the government calls them the “victims” and offers them hand out after hand out… while those of us who set ego aside and used common sense get nothing. I call them unethical, immoral, scammers who try to suck they system dry whenever they can.

I get that alot of people lost their jobs and could no longer afford their house. They are true victims. And those of us who did things the right way are victims too. But there were ALOT of people who just took what they could get. It says something about our society…. and that something is not good.