Loan Modifications, Government's Preferred Foreclosure Remedy

Cleaning up a uniquely collapsing mortgage market it going to challenge the creativity of the US government. One of the most innovative solutions that is under 'beta testing' is the broad use of loan modifications.

These modified refinancing programs replace defaulting borrowers' loans with new affordable mortgage payments and terms. This plan is currently being used extensively by IndyMac Federal Bank, in the wake of FDIC's takeover of that troubled institution.

Help Borrowers and Taxpayers

FDIC Chair Sheila Bair has long advocated loan modifications as a win-win to the mortgage conundrum. Under a loan modification distressed borrowers get to remain in their homes with a restructured mortgage--typically offering lower payments. The lenders exchange these more favorable terms for continued payment from the borrower, while forgoing the expense of foreclosure, owning the real estate, and selling the home.

Borrowers win, lenders win, and taxpayers win. There may be the other benefit to large scale loan modifications on troubled bank and mortgage institution loan portfolios. These mortgage modifications seem to be more efficient than the traditional foreclosure path and mitigate losses to all parties.

Reducing Foreclosures and Housing Inventories

"These [loan modification] efforts have prevented many foreclosures that would have been costly to the FDIC and investors," said Bair in her recent testimony to the House Financial Services Committee.

This simple statement translates into a lot of benefits. Preventing foreclosures reduces the dumping of more homes into a flooded housing market. Lowering the cost to the FDIC reduces growing taxpayer burden in cleaning up the mortgage mess. And, reducing cost to investors eases the continued run-up of risks and bailouts of investment banks.

The program seems to be a silver lining in the current mortgage meltdown. Bair explained that of the 742,000 loans the FDIC is now responsible for at Indy Mac Federal Bank 60,000 o them are now 60 days past due on payments; however, 40,000 are now eligible for loan modifications and can avoid foreclosure.

Streamlined Foreclosure

Some against broadly offering loan modifications suggest that the solution should be to streamline the clogged foreclosure process. Their perspective is that loan modifications simple delay the certain, in a declining economy, and extend the mortgage crisis.

Certainly no one has completely arrived with the final solutions, but the horizon does look full of opportunities for homeowners to avoid losing their homes and loan modifications may be one solution.