Will a Loan Modification Stop a Foreclosure?

by tammy on March 25, 2010

Whether or not a loan modification agreement will stop foreclosure proceedings all depends on the unique circumstances of each individual case as well as the financial position of both the borrower and the lender and the resale potential of the property in question. Loan modification can result in the lender stopping foreclosure proceedings, but it all depends on whether or not the lender believes they stand to make the most money by foreclosing or accepting the new terms as determined through the loan modification negotiations. Remember that loan modification is generally a voluntary process and the lender has to see some reason to accept the new terms.

One of the key elements of the real estate boom prior to early 2008 was that most of the properties were being purchased were significantly overvalued, so in many cases it is very much in the lender’s best interest to keep the old mortgage, based upon the old value of the property, intact if at all possible. Therefore, if the lender forecloses it loses more than merely the cost of the foreclosure, but also higher value of the property, a factor that has to be taken into consideration when assessing the cost of foreclosure. Of course if the property did not depreciate much or is deemed likely to rebound quickly, the lender may believe that a quick foreclosure and then finding a new buyer is much more in its interests than loan modification.

The timing of the appeal for loan modification negotiations also plays a key role in whether or not a lender is likely to accept this proposal. Depending on the market, the foreclosure process usually costs the lender between $20,000 and $40,000 from start to end. Therefore, if the proposal for loan modification comes at the very beginning of the foreclosure process – before much money has been spent – some lenders may be more inclined to consider the idea. Whereas, if the borrower waits until the foreclosure process is almost completed, most lenders will not even consider loan modification since most of the money for the foreclosure process has already been spent and cannot be returned.

A lot also depends on the relationship between the borrower and lender. For example, if the mortgage is held by a local bank that the borrower has a long standing relationship with and uses a wide range of their services, the lender may be more inclined to negotiate. Whereas if the mortgage is held by a trust and administered by a management company – which gets more money for foreclosing – then it is much less likely that the lender will consider any loan modification proposals. Further, many major lenders have their own strict policies that determine when and under what conditions loan modification is to be considered, and often these internal guidelines close the door on loan modification after foreclosure proceedings have been initiated.

In the end, it all depends on the individual circumstances involved in each case, so there is no universally applicable answer to the question of whether or not loan modification agreements can stop foreclosure proceedings.

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