Bank loan modification is more likely to end in default

House

More people get bank loan modification than federal modifications, but more default on banks mods. Image from Wikimedia Commons.

More people are likely to get bank loan modification than through the government. Troubled homeowners, under certain conditions, could apply through a government-run program for mortgage modification. However a good idea it seemed, the program has been less successful than hoped. As a result, banks have been stepping into the void to modify the mortgages of customers on their own. However, there is an unfortunate corollary. Homeowners are more likely to default on payments if they receive a bank modification.

Bank loan modifications outpace HAMP

The Home Affordable Modification Program, or HAMP is pretty simple. Distressed homeowners apply for a loan modification through the federal government. If certain criteria are met, they receive a trial modification on the bank loan for their home. If the trial is successful, then they get a permanent modification. Unfortunately, less than 45 percent of all permanent modifications stick. According to CNN, of those that default out of the federal program, 44.5 percent end up with a modification from their loan lenders anyway. There are two bank modifications made for every single HAMP modification.

More default on bank modifications

Unfortunately, there are also more defaults on bank modifications. Of the permanent modifications made by HAMP, 11 percent default again. On the modifications made by lenders, 22 percent default. However, there is a reason for that. Of the few who are successful in the HAMP program, the average reduction in monthly payments is $608. Bank modifications lower monthly payments by an average of $307. That may be enough to create breathing room for some, but obviously some homeowners will still be running for payday loans to keep up.

Housing tied to employment

Until employment reaches pre-recession levels again, the real estate industry is likely to make only modest improvements, if any. There have been some causes for hope. Most indicators point to the recovery being slow but steady.

Sources

CNN

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