Why Was Your Trial Loan Modification Rejected?

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What Just Happened?

My clients have told me that it feels like they just got kicked in the stomach. After months of diligently making reduced payments, not only do they get a letter or phone call telling them that their trial modification has been rejected; but, they are also told that they now have an enormous past due balance that has just been reported to the credit bureaus! These people played by the rules, submitted their paperwork and diligently made all their payments. So, why was the trial loan modification rejected? In order to understand why their trial modification failed, homeowners need to understand what a loan modification means to a bank.

The Modern History Of Loan Mods.

When the market began its cataclysmic turn in 2007, most people had never heard of loan modifications. Companies promising mortgage relief sprang up virtually overnight. Many times, they were run by the very same people that hotboxed consumers into the bad loans that brought them to the brink in the first place. The companies usually took anywhere from $2,000 to $5,000 up front and guaranteed success. They recommended that borrowers discontinue making payments so that the bank "would take them seriously". Unfortunately, homeowners often discovered that the only thing this practice guaranteed was eventual foreclosure! In the first few months of 2009, the government stepped in to assist the beleaguered American homeowner. The federal government and many states put moratoriums in place making it more difficult and time consuming for lenders to foreclose. While this did give folks more time to try and process a loan modification, all those missed payments meant larger losses to lenders. So began the age of the "trial loan modification".

When A Trial Isn't Really A Trial!

Upon first hearing that they have "qualified" for a trial loan modification, struggling homeowners become elated. They are informed that they are well on their way to approval. Once all of the necessary paperwork is submitted and the affordable monthly payments made, they will be approved for a permanent modification allowing them to keep their home and make more reasonable payments for the remaining life of the loan. Little do they know that merely applying for the modification is the only qualification for trial modification approval. They have no idea that banks have created trial loan modifications for the sole purpose of collecting some money while borrowers navigate the loan mod process. That's right, after having millions of borrowers stop making payments, the banks put into place the trial modification payment program to induce people into making reduced payments and decreasing the amount of money the lenders were losing during the modification process. Making all the reduced payments is no guarantee of success whatsoever. Your lender still underwrites your modification the exact same way they always have. As disingenuous as it is, it's pretty smart when you think about it!

They Just Want The Money!

The reason that banks decline more than five times as many loan modifications as they approve is because they want the money! Mortgage lenders are allowed to loan out many times the amount of money they have on deposit. That means that even though they often take breathtaking losses on foreclosures and short sales, it is still a far more profitable endeavor than modifying loans for existing homeowners. Remember, banks have stockholders and need to remain profitable. As heartless as it sounds, unless it is a good business decision, they shouldn't do it. With more than half of successful loan modifications going into foreclosure anyway, lenders feel like they are just putting off the inevitable.

The Short Sale Solution.

I know you want to keep your house. You wouldn't have applied for the loan modification if you didn't have a sincere interest in trying to remain in your home. Unfortunately, it may not be in the cards. Realistically, your lender isn't going to reduce the balance of your mortgage. With that in mind, even if you are approved for a loan modification, you are going have to agree to pay way too much for your house all over again. Why are you so ready to repeat the same mistake just because you may get more attractive financing? Wouldn't you be much better off selling your home for less than the loan balance, renting for a couple of years and buying something in the same neighborhood at a huge discount? With all of the new programs, including HAFA, designed to assist homeowners in getting their home sold for less than their loan balance, it doesn't make much sense for most homeowners to even attempt a loan modification, much less follow through! Do some research on short sales, find a certified specialist and get that giant mortgage monkey off your back!

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Source by Jeremy Colonna

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