What Is Mortgage Loan Modification?

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What Is Mortgage Loan Modification?

Loan modification is the altering of mortgage loans. Though it has received considerable press since the beginning of the "Great Recession" in 2007, loan modification has been around since the 1930s when the Great Depression wiped out many people’s ability to pay their mortgages.

Loan modification programs were created to address the large number of home foreclosures that affected much of society, from homeowners and their families to investors and financial institutions, to communities that stood to lose revenue from property taxes. They aim to stabilize the housing market and improve the overall economy; because so much wealth is tied up in homes through equity, spending power is also affected when a person faces foreclosure.

When a homeowner’s loan is modified under a federal or state program, that homeowner stands a better chance of making mortgage payments and thereby preventing foreclosure. The lender, in turn, has an interest in keeping mortgages in a performing state because they are more valuable that way.

Who offers loan modification programs?

Several government agencies have worked together to craft programs. They include the Treasury Department, the Federal Housing Administration, Fannie Mae and Freddie Mac, the Department of Housing and Urban Development, and participating financial institutions and other finance-related entities.

As well, lenders have their own versions of loan modification, which homeowners can take advantage of if they face foreclosure.

Program availability

Mortgage modification programs are revised or ended based on many factors, such as their rate of use by homeowners.

Many financial institutions participate in one or more of these programs. To find out whether your bank, credit union, or other financial institution participates in any of them, you must contact it and ask. You will be evaluated for programs based on the criteria that the programs require, and you will work with a counselor to gather documents on your loan, your finances, and your circumstances.

A word about scams

Scammers have preyed upon unsuspecting homeowners looking for federal assistance ever since the mortgage programs were created. They make guarantees such as "saving" your home or lowering your mortgage, usually for a fee. Some of them even cajole homeowners into transferring ownership of their homes to them. They may falsely claim to have direct contact with your mortgage servicer, and they may insist that you start making your mortgage payments to them.

However, they do not have the ability to help distressed homeowners. Homeowners should contact their lenders if they need help with their mortgages.