Look! Look! A loan modification!

For all of the discussion that loan modifications would temper the mortgage crisis and the assertion that  lenders are doing them voluntarily, none of my clients had been offered a modification until last week.  The loan proposal I reviewed did not address falling home values, but did offer modifications to terms that might keep the homeowner in the property.

The lender proposed to add the very substantial loan default to the principle of the loan and to fix the formerly variable interest rate for the life of the loan.  What made this proposal tolerably attractive was that the interest rate was lowered some three percentage points, such that the monthly payment over the remaining loan life was the same as now.

If the client accepts this proposal, he waives all existing claims against the lender.  He pays some fees of a couple of thousand dollars.  He still has a loan that is larger than today’s value of the house, but he has a shot at keeping the house.  My hope is that this is just the first of many loan modifications that lenders will propose;   otherwise, banks are going to own lots of local houses.