In my experience, working with hundreds of Seattle area pre-foreclosure homeowners since 2004, the homeowner is best served when they find closure as soon as possible.
Loan modifications, for the vast majority of homeowners, only postpones the inevitable.
Consider this reality: Out of 3.1 million delinquent mortgages in September of 2009, only 16% have been successfully modified. The average homeowner has roughly a one in six chance of getting their bank to agree to a loan modification.
To even get to that point, the homeowner usually has to suffer through months of agony, as they fax and re-fax the same documents to the lender, are given conflicting information, and struggle to come up with the funds necessary for entering trial forbearance programs.
But what happens to a homeowner who successfully achieves a loan modification? The majority of homeowners (56%) re-default within 12 months. After just three months, 28% are already in default.
That takes the odds of success down to one homeowner in twelve. But even that sole survivor is not in great shape.
Only 10% of the loan modifications involve a principal reduction. The loan modification is usually achieved by lengthening the term of the loan, or making the loan into an interest-only loan, with the principal payback postponed until the future sale of the house. What this means is that the borrower continues on the hook for a property that is underwater, for an additional ten years, without paying down the principal for the entire time. That is not the recipe for success. It is that kind of creative lending that caused the bust in the first place.
Here are the specific track records for a few select lenders:
Bank of America: 11 percent of eligible loans have been modified under the Making Home Affordable program.
JPMorgan Chase: It has offered modifications to 27 percent of eligible borrowers through the federal program.
Wells Fargo/Wachovia: They have modified 17 percent of eligible loans.
All of the above numbers come from the September 2009 report of the Office of the Comptroller of the Currency, or OCC, which regulates national banks. The OCC is a division of the U.S. Treasury, the entity that oversees the Making Home Affordable program.
The bottom line is that if a homeowner wants complete, guaranteed finality to their situation, there is usually just one answer. Find a new housing payment that they can afford and lock it in. For many homeowners, that means ditching their $2,500/mo mortgage payments and renting a $900/mo studio apartment. I understand, that might sound horrific to homeowners who have never missed a payment in their lives and feel like they are just going through a rough patch.
However, in my experience homeowners will choose to drain their retirement accounts in an attempt to save their house, yet in the end, completely run out of money and be forced to move anyway. In contrast, I have seen great results from homeowners who make a clean break from a bad situation and as a result, preserve their precious resources.
Another significant result of taking charge of the situation, is the added benefit of freeing up mental space to pursue new income opportunities. By not spending all the waking moments focused on the past, amazing amounts of creative energies are released.
Perhaps someday, the Making Home Affordable loan modification program will work for the vast majority of homeowners. In the meantime, carefully analyze the existing program, and make sure it works for your situation, before committing precious time and money to getting a loan modification.
Click here to learn more about the Seattle Short Sale Advantage program, and how it has helped hundreds of other local homeowners.