Thursday, October 1, 2009

Why Loan Modifications Won't Fix the Real Estate Market

It continues to sadden and anger me to read and hear the stories of homeowners who get the run around from lenders when trying to get loan modifications.  It is even more proof that the banks are incompetent.  What we all need to understand is that loan modifications will not solve this real estate market problem.

The reason loan modifications do not work is that over 50% of the people who receive loan modifications will re-default within 12 months. I am guessing that the figure is upwards of 80-90% when you extend the time frame out.  The lenders (servicers and investors) know this, and, as a result, have little to no motivation to modify loans.

The truth is that the loan investors (not the servicers) would prefer to do short sales, rather than loan modifications or foreclosures.  In a declining market this actually makes business sense.  Since the loan investors will likely have to foreclose later anyway they are better off doing it now before the market declines more and they end up with even less money from the foreclosure sale.  With respect to the loan servicers, there is a conflict of interest with their loan investor clients.  The loan servicers make more money by allowing loans to continue to be seriously delinquent and go all the way to foreclosure rather than approve loan modifications or short sales. The problem is that the loan investors reduce their losses more with short sales rather than foreclosures.  This is one of the reasons short sales are so difficult to get closed.  That is why short sale sellers need a "bulldog REALTOR" like me to close their short sales.  I am not afraid to pester the lenders to force a decision on a short sale.

The reasons loan modifications generally do not work are:
  • Job Loss - Homeowners are losing jobs. You can't pay your mortgage if you are out of work for an extended period of time. The government needs to fix the problems (think laws, policies and taxation) that are causing jobs in the US to disappear.
  • Negative Equity - Eventually, even the most stable of homeowners will give up paying their mortgage when they owe a lot more than their home is worth.
Therefore, regardless of whether more homeowners receive loan modifications or not, foreclosures and short sales will continue to get worse and housing prices will continue to decline.

If you are a homeowner who is having a hard time paying your mortgage you should try a loan modification first even though it is a low probability proposition.  I would be glad to provide you with some FREE help so that you can increase your chances of obtaining a loan modification.  If you live in the following areas, please contact me as I can help you solve your real estate problems since I am a Middle Tennessee short sale, pre-foreclosure (preforeclosure) and foreclosure expert and REALTOR.
  • Rutherford County Tennessee: Murfreesboro TN, Smyrna TN and La Vergne TN (LaVergne TN)
  • Williamson County Tennessee: Brentwood TN and Franklin TN
  • Davidson County Tennessee: Nashville TN and Belle Meade TN

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