Loan Modification Hell: 500,000 Borrowers Could Lose Their Temporary Loan Modifications

Loan modification hell: Fixing this has become a good news/bad news situation:
  • Good news: According to the latest numbers on the Making Home Affordable Program, mortgage lenders increased the number of borrowers in permanent loan modifications by 45 percent in February.
  • Really bad news: Only about 170,000 loan modifications have been made permanent through HAMP.
  • Good news: Those borrowers who have had their loans modified will have much lower payments (because the interest rate has been lowered to around 2 percent) for five years before the payments begin to rise.
  • Bad news: There are 835,194 borrowers still in temporary loan modifications.
  • Good news: 91,843 borrowers are in "pending permanent modifications." This means that the servicer has approved a permanent modification, but the homeowners has yet to accept it.
  • Bad news: Nearly 90,000 trial loan modifications have been canceled.
  • Good news: According to the mortgage loan servicers, approximately 1.354 million trial loan modifications have been extended to homeowners so far, including just over one million HAMP modifications.
  • Bad news (with Treasury's best spin possible): According to Treasury, the 1.354 million trial loan modifications is 35 to 45 percent of the 3 to 4 million homeowners President Obama said the plan would help.
But here's the worst of it: Even though a total number of temporary loan modifications is a seemingly respectable 1.354 million, up to 500,000 borrowers could lose their temporary loan modifications.

More than half a million borrowers have already made the three required trial loan payments with no permanent loan modification offer from their lender, according to Treasury data. In a Washington Post analysis, reporter Renae Merle concludes that many of those borrowers will not be receiving an offer for a permanent loan modification.
Some won't qualify for a permanent loan modification because their lender feels they make too much money. Some because they make too little. Or, it might all come down to an extra $200 in a checking account.

What will happen to them? Some will get a non-HAMP private label modification from their lender. Most will fall into foreclosure. Some might be able to get away with a short sale.

In short, it's hard to see how the government will wind up helping 3 to 4 million avoid foreclosure.

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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and the upcoming Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com.