Everyone would like to keep their home!  But many of us paid too much for the home, or our home value has dropped a lot, and/or we have a loan that is resetting at a much higher interest rate and loan payment.

If your home is underwater, a loan modification will not really solve your problem. What you really want is a reduction in the principal - the amount owed on your mortgage. Good luck with that!  While it's common sense to you that a bank would be better off reducing your loan amount by $100,000 rather than losing $150,000 in a foreclosure, banks simply do not have common sense!

Government Programs

Our federal government has been trying to encourage lenders to modify loans to lower monthly payments. Our government's biggest effort is the Home Affordable Modification Program (HAMP). It's part of the 75 Billion "Making Home Affordable" program. The aim is to help 3 to 4 Million homeowners modify their mortgages to make them more affordable through 2012. However, reducing the amount of your mortgage (the principal), is not a goal. And there are many conditions that make the program unworkable for most people.

Nationwide, as of April 2010, 1.2 Million trial loan modifications had been started, but only 295 Thousand were made "permanent", and 278 Thousand were "cancelled". That means that less than 10% of targeted homeowners that should be able to qualify for lower loan payments had actually been able to do so in this program.

Our federal government also has the smaller Home Affordable Refinance Program (HARP). The program is supposed to provide homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. To qualify for this program, you must have a perfect payment history, and your mortgage balance cannot be more than 125% of your home's current market value.

Your Credit is Automatically Damaged

Credit rating agencies consider a request for a loan modification to be a sign of financial difficulty if you have not missed any payments yet. HAMP and HARP require you to begin with a minimum 3 month "trial" loan modification period. During that time the lender will notify the credit agencies that you are part of the loam modification program, which will reduce your credit rating 100 - 200 points.

The credit agencies defend their ratings. According to Norm Magnuson, spokesman for the Consumer Data Industry Association, "people who sign up for loan modifications would not be asking for help unless they are having severe money problems".

Eight (8) Reasons Loan Modifications Fail

Very few loan modification attempts are successful, as noted above. Here are 8 common reasons that loan modifications fail.

[1]  Lenders make promises and later deny or retract loan modification offers.

[2]  "Temporary" 3 month loan modifications are usually required, but 3 to 5 months later homeowners are told they do not qualify for a "permanent" modification.

[3]  Lenders continually request updated financial records. This is not just a nuisance, but also a tactic used by lenders to extract further payments from you and to try to determine available assets for lawsuits.

[4]  After following the lender's instructions to make reduced payments as part of a temporary modification, when the lender later rejects that loan modification you are now in default and the lender can foreclose more quickly.

[5]  Most loan modifications are only a forbearance under which the missed payments, lender penalties and lender interest are added as a balloon payment to the end of the loan, which increases your mortgage balance and therefore your negative equity.

[6]  Failure to disclose the investor that owns your mortgage and their investment calculations to you make the decisions of the lender seem unreasonable and illogical.

[7]  Permanent loan modifications are not typically truly permanent. In most cases lower interest rates are only fixed for 3 to 5 years.

[8]  If you decide to sell or walk away from your home after receiving a "permanent" loan modification, it may be too late to receive the benefits of the federal Mortgage Debt Forgiveness Act, creating a tax obligation that you may not have faced, if you had sold your home in a short sale.

Based on the results of loan modification attempts to date, it seems the whole process is being used by lenders to keep you making some kind of payment and open to a deficiency lawsuit, rather than to help you as the federal government programs intend.