HOMEOWNERS ARE FOUND TO BE IN A WORSE POSITION AFTER A LOAN MODIFICATION FAILS THAN WHEN THEY FIRST DEFAULTED ON THEIR MORTGAGES
A recent article in The New York Times reports that the Obama administration’s mortgage relief program, originally intended to protect 3,000,000 households from foreclosure, now looks as if it will help as little as 1/6th of that number.
Another recent article reveals that only 7% percent of all Loan Modifications are ultimately successful.
The dropout rate from the Making Home Affordable Program (“HAMP”) now stands at 616,000 Loan Modifications cancelled by the banks. Thus far, only 422,000 Loan Modifications were approved in 2010, and that number is now drying up. Only 17,000 trial Modifications were started throughout the United States in July of 2010.
The tragedy of the failure of the Loan Modification programs is that homeowners are actually in a worse position after a failed Loan Modification than they were when they first started defaulting on their loans.
In most cases a Loan Modification takes approximately 6-9 months to complete. During that time, the homeowner is paying 50%-75% less than the regular mortgage payments. Once a Loan Modification fails, the banks demand the back mortgage payments or they proceed with the foreclosure sale. On an average, a nine month failed Loan Modification program could easily equal $18,000 - $36,000 of back mortgage payments for an average family. That family is now faced with the option of making an $18,000 payment to the bank to reinstate their loan, or to face an immediate foreclosure sale.
Another tragedy is that the legal foreclosure process does not stop during the application period for the Loan Modification. As a result, I see many clients who come to me days before a foreclosure sale is scheduled, having been notified by the bank that their Loan Modification is denied and that the foreclosure sale is going to proceed as scheduled.
The final tragedy in this drama is that during the Loan Modification trial period, families are continuing to juggle and pay debts, and may be withdrawing IRA and Pension funds to make their monthly mortgage payments or credit card payments.
As we all know by now, a well-planned bankruptcy case will allow a client to erase most if not all of his credit card debt, unload an unwanted car lease or second mortgage, and preserve his pension and retirement accounts in full. In a Chapter 13 Bankruptcy case the mortgage arrears can be paid out over a five year period, and most unsecured credit card debt can be paid off as low as 2 cents on the dollar.