Will a Loan Modification Stop Foreclosure?

by tammy on April 2, 2010

There are no restrictions on when a person can request loan modification, either directly or through the government-sponsored Making Home Affordable (MHA) program and this means it is entirely possible to make such a request after foreclosure proceedings have already been initiated. Whether or not a loan modification will result in foreclosure proceedings being stopped depends in large part on whether or not the lender believes that the amounts to be realized through loan modification are significantly more than would be realized through foreclosure. Loan modification is a strictly voluntary process and if the situation has already degenerated to the point of the lender initiating foreclosure, the proposed loan modification agreement would have to be very lender-friendly for it to be taken under consideration by the lender.

Prior to the collapse of the American residential real estate market in 2008, most of the properties on the market were significantly overvalued and sold for considerably more than they are actually worth in today’s market. In these instances, it is frequently in the lender’s best interest to accept loan modification as opposed to foreclosure, since the amount that they can realize from the devalued property is likely much less than the amount to be made if the old mortgage – at the old overvalued price – can be maintained. Obviously a large part of this calculation depends on the current market value of the property as opposed to the value that the original mortgage reflected. If the property did not depreciate significantly or is in a market that is expected to quickly rebound, the lender is much less likely to consider last minute loan modification proposals.

The timing of a loan modification proposal in the foreclosure process also plays a significant role in whether or not a lender will accept it or not. On average, foreclosure proceedings cost the lender between $20,000 and $40,000 from the initial notice to foreclose to the end of the process when the property is fully returned to the lender. This is a fairly significant expense, especially since many lenders have already taken a serious loss on the property through the borrower’s failure to make their regular payments. In that this money is for a legal process, none of it is refundable to the lender (though some may be written off as a capital loss or business expense), so if the foreclosure process is stopped, the money already invested into it is simply lost. Therefore, it is much more likely that a lender will take a loan modification proposal made at the very beginning of the foreclosure process much more seriously than one offered after a lot of money has already been invested.

Finally, a lot depends on the relationship between the borrower and lender. Some mortgage lenders have considerably more complex relationships with their clients than others, so the overall nature of this relationship plays a significant role in whether or not a lender will consider a loan modification proposal, or even discuss the matter. If the mortgage is being serviced by a management company on behalf of a trust or other aggregate, there is little chance that loan modification will be considered because the management company usually makes more money by pursuing foreclosure than they would through loan modification. On the other hand, if the mortgage is help by a local bank with which the borrower has had a long term and comprehensive relationship with, the bank is much more likely to at least consider loan modification before foreclosure proceedings get too far advanced.

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