According this article, nearly six out of ten troubled borrowers who were able to negotiate loan modifications during the first quarter re-defaulted after eight months. This report is consistent with what we hear since we talk with a dozen or sell home owners every day.
Why such a high default rate? I have a few ideas.
First off, let’s talk about what a loan modification is: It’s when your lender agrees to basically refinance your loan with (hopefully) better terns and (hopefully) putting your past due payments into the modification. The latest statistic I saw was that only 1 in 10 requests for loan modifications are granted. Why? You have to prove your hardship is over and you can afford the new (often times higher) payments. Most people can’t do that – they fell behind because payments were too high to begin with.
If you’re part of that 1 in 10 that do get approved, why such a high failure rate as mentioned in the above article? Here are the most common reasons:
- In a weak economy, families’ incomes are not as consistent
- All of the other costs of living are higher: utilities, insurance, groceries and other basics – it all adds up (and keeps adding up)
- Many people took advantage of the ability to refinance multiple times during a strong economy. Income was good, interest rates were low, credit was easy to get, etc. Many over-leveraged themselves (created higher expenses) and now that things have reversed (especially in Michigan), many of us just can’t pay all of the month expenses.
Once you default on a loan modification, I’ve never seen a family be able to get approved for a second modification. The result of all of this? Multiple late payments reported on credit and many times another eventual Michigan foreclosure.
If your hardship is truly over, by all means, pursue a loan modification, but know the averages and realize the vast majority of people end up in far worse positions down the road.
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