What Are My Chances of Getting a Loan Modification?

First, if you want to see why in fact it is so hard to get a loan modification these days, look no further than this great video which explains it all. Be prepared, it's a big slap in the face to us tax payers.

• Q. Loan modifications.  I’ve heard of them and don’t know a single soul who has been successful in getting one.  Are they worth the effort and what are my chances of getting one?

• A.  Loan modifications are loans where the current servicer of the loan is asked to change the loan to a 30 year fixed or in other words modify the loan from its current state without refinancing costs or paperwork.

Are they worth the effort?  Yes, if your efforts are successful. So the real question is the second one asked.  What are your chances of getting a loan modification?  To know your chances of success is to understand what happens after a home buyer gets a loan.  It may not be what you think.

When you get a loan and move into your new home you now have a mortgage.  This mortgage gets split into two parts: the mortgage bond (your promise to pay) and the servicing.  The mortgage is a bond that is your promise to pay a loan for a set period at a set rate etc.  This bond goes to Fannie Mae, Freddie Mac or FHA to be converted into a marketable security.  That compares to paper money that represents gold held by a given country. The marketable security represents the bond as it sits with these organizations.  Marketable securities (mortgage bond’s) are usually bought up in large batches by 401K’s, IRA’s and mutual funds as a very stable investment.

The servicing is the right of a bank to collect the monthly payments and send those payments to the buyer of the marketable security.  So you see the bank rarely owns the mortgage.  They are the middle man collecting the payments and sending them along.  Why you ask would a bank want this job?  So that you will open every letter they send  as they market you for checking accounts, CD’s and other bank products.  That’s why a loan looks like its being sold to other banks a few years after you buy your home.  In truth, the mortgage isn’t being sold, the servicing rights are.  The old bank is just giving up marketing you for their products and selling your servicing to another bank for a premium.  Most likely you didn’t sign up for any of their products so they are cutting their losses and selling you to the next bank.  Nothing happens to your loan payments or conditions of the loan.  The only thing that changes is who you send your money to.

Now back to our question, what are your chances of a loan modification?  To modify a loan the servicing bank has to contact the true bond holder (401K, IRA or mutual fund for example) and ask their permission to modify it.  If someone came to you owing you money and asked out of the blue “Can you lower my rate for free?”  What would you say?  That’s why loan modifications aren’t so successful.  Now if there was free money involved (government money?) then maybe the bond holder would allow the modification.  Another reason may be if there were numerous late payment or missed payments on a mortgage then the bond holder would fear a foreclosure and agree to modify or lose the entire loan.

Now you can see why loan modifications are rare.  If you can get one then you are extremely lucky.  But chances are, if you have gotten one you are also someone who has missed some mortgage payments and your credit score is trashed for the next several years.

Please don’t purposely trash your credit scores by intentionally missing mortgage payments to inspire a loan modification.  They also look at bank balances and means of making payments among many other financial factors to decide if you can modify.