The Inner Dynamics of Mortgage Modification

Recently, I received an email from one of my clients. She asked me to explain the inner dynamics of Loan Modification. For the untrained eye, the answer seems simple; but the reality is much different.

Through examining recent US history from the economic perspective, similarities do shine. During 1980s, similar conditions were present. Back then, most of consumer lending was based out of financial institutions commonly known as Savings and Loans. Facing outside competition from newly rising Asian power houses, S&Ls began offering creative loans. As the competition became stiffer, both sides relaxed restrictions and underwriting became a mockery of its original role. By 1989, most mortgages went into default. In response, the US Congress went into an emergency session and produced FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act) which resulted in a massive investigation and realignment of the financial sector in Wall Street. In the end, the crisis melted away on its own after leaving the world in economic turmoil known as 1990 – 91 recession.

After a number of years, the world economy recovered and cash reserves began to build up in accounting books. Revenues increased from the government funding bad loans on the expense of common tax payers. Moreover, the events of September 11 took attention and resources away from different government branches.

In 2004 a new boom took over the business world. Stocks climbed to new heights reflecting news of wide spread prosperity. New wealth had been created and almost everyone wanted a piece of it. Real estate professionals ignored lessons from the past and based prices on aspired earnings instead of actual market values. Bankers blurred the lines between commercial and residential loans offering adjustable rates to all consumers. Riding on the same wave, many home owners cashed out the equity in their homes creating higher demands for consumer goods. In turn, stores over expanded and opened multiple locations within the same geographical area.

The sweet sounds of success turned into agonizing cries as rates began climbing upward. Consumers blamed realtors who in turn blamed bankers. No matter whose fault it is, everyone felt the pinch. In order to avoid repeating the same mistake, financial experts produced a new device to reconfigure existing loans. This new financial device is commonly known as Loan Modification.

Through Loan Modifications, banks and borrowers each carry part of the responsibility. Banks agree to lower the interest and recalculate their profit margins. Borrowers control and adjust their life style to match the new payment. Once payments had been made for a consecutive year, the loan becomes seasoned and packaged for sale on the secondary market by different government entities such as FANNIMAE.
Thanks to such creative devices, the real estate market began to adjust. Last month, NAR reports an increase of 3% in sales of new homes. Loan modifications acted as the adjustor factor reflecting the new economic reality. My firm offers to assist needy borrowers with the many forms needed to obtain a loan modification under the Obama plan.

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