What is the success rate of loan modifications?

This question could be interpreted in several different ways. Getting a loan modification, meaning that the borrower is able to negotiate terms with their lender and make their payment more affordable, is just the first step in the process. Factors determining whether borrowers get a loan modification include:

  • Their financial situation
  • The lender’s guidelines for loan modifications
  • Whether they had a prior loan modification

Completed Loan Modification Statistics

Here are some sobering statistics on mortgage loans that were modified in the first quarter of 2008: Within three months of the modification, over 35 percent of the borrowers were over 30 days late, or had missed at least one payment. After six months of the modification, the default rate was nearly 53 percent After eight months of the modification, the default rate was 58 percent.

Reasons for Re-Default

Some reasons that borrowers go back into default, contributing to the figures above, are: Further employment hardship. Borrowers who had a change in employment that prompted the first modification may be faced with another. Borrower is in a negative equity position. Borrowers who struggle to make payments, even after a loan modification, and whose house is worth far less than they paid for it may be less motivated to want to keep a home, knowing that it make take years, if ever, to be able to sell it for a profit. Borrowers continue to overextend themselves, even after a loan modification. Whether this is due to necessity, or a lifestyle that creates it, borrowers who find themselves spending more than they take in are headed for re-default. Modifications were less than needed to keep the borrower in payments that they could afford. Modifications that are unable to make the payment low enough to what the borrower can realistically afford will put them back in default. The borrowers assume that if the lender granted them one loan modification, that more will follow. Every dollar that the lender forgives, either in principal or payment, short term or long term, is a dollar that they expect to recoup at some point down the road. Lenders are leery of giving second chances to borrowers who have been in difficulty before.

Things to keep in mind

Many borrowers, in the days of loose lending standards, were able to buy homes with little or nothing down, challenged credit profiles, and alternative income documentation. Some of these borrowers, in a nutshell, should have never purchased, or been lent money to purchase these homes, and even a loan modification will be unable to save them. The same lifestyle that spurred them to buy a house that, in a “normal” market would have been out of the question, led them to make other purchases, perpetuating the level of debt. There are, however, borrowers who come out of the loan modification process in much better shape than before, and understand that living within their means, as best they can, will help them to keep their homes.

Published on November 23, 2009