Will a Loan Modification Stop a Foreclosure?

by tammy on June 8, 2010

There are no restrictions against opening loan modification negotiations with a lender even after that lender has initiated foreclosure proceedings against a particular borrower. Therefore, it is at least possible that some sort of loan modification agreement may stop a foreclosure. However, this depends on a number of things such as a willingness on the part of the lender to stop foreclosing and how far the foreclosure process has proceeded.

As a general rule, most lenders only resort to foreclosure once they determine that this measure offers the return on the loan, i.e. when it makes financial sense for them to do so. If, for example, the property is in a bad local market or the original mortgage amount is well in excess of the revised value of the property since the collapse of the housing market; the lender would be much more inclined to at least try to reach some sort of agreement with the borrower to keep the old agreement intact. In fact, in such circumstances, the lender might propose loan modification before initiating foreclosure proceedings.

However, once the lender has decided that foreclosure is the right option, loan modification becomes much more difficult for the borrower to offer. Specifically, whatever terms the borrower offers has to offer not only more profit than foreclosure would offer, but this increased money is usually expected to be paid faster. Plainly, if the borrower is already having enough difficulty making their mortgage payments that foreclosure is even an option, then chances are good that the same borrower is not in a position to offer the lender terms that would convince them to reverse course.

It should also be understood that foreclosure is an expensive undertaking for the lenders. In most states, from start to finish, a foreclosure will cost a lender between $20,000 and $40,000 in cash out of pocket. Generally it is safe to say that the lender would prefer to avoid this, so by the time foreclosure is seen as the lesser evil, the amount required of the borrower to change the lender’s mind is substantive.

The cost of foreclosure proceedings also ties into how far the foreclosure has gone. If the lender stops foreclosure proceedings, any money they have already invested into the process is simply lost. Therefore, if the borrower suddenly comes into some cash that will successfully convince the lender to stop foreclosure; this would probably only be the case if the foreclosure was just in its initial stages. After the foreclosure has proceeded to a certain extent and so much money has been invested into it, it would be very difficult for a borrower to convince the lender to reverse course.

Therefore, while it is theoretically possible that a loan modification agreement might stop a foreclosure, in general this is not likely. By the time the lender has determined that foreclosure is the best option, then the borrower would really have to undergo a major change in circumstance (receive a rich inheritance, win the lottery, etc.) and pay a lot to the lender to get them to stop the foreclosure process. So, yes, a loan modification agreement could theoretically stop a foreclosure, but it is extremely unlikely in most cases.

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