Mortgage Modification

AAA

DEFINITION of 'Mortgage Modification'

A permanent change in a homeowner’s home loan terms that makes the monthly loan payments affordable. The goal of mortgage modification is to prevent foreclosure. Mortgage modification can benefit homeowners by preventing them from losing their home and can benefit lenders by avoiding  the costly foreclosure process.

INVESTOPEDIA EXPLAINS 'Mortgage Modification'

To apply for a mortgage modification, a homeowner must complete an application package documenting income, assets, expenses and financial hardship.

The biggest mortgage modification program in the United States is the Home Affordable Refinance Program, created in 2009 by the federal government in response to the nation's housing crisis. This program helps homeowners who are struggling to pay their Freddie Mac or Fannie Mae-backed mortgage apply for mortgage modification with their loan servicer. These are borrowers who cannot do a traditional refinance to improve their loan terms because their home value has declined below the mortgage balance.

A similar program called the Home Affordable Modification Program helps borrowers with Federal Housing Administration-backed mortgages. Borrowers can also apply for a mortgage modification outside these federal programs. A nonprofit housing counselor can help with the process.

While a mortgage modification generally means less income for the bank because of a reduction in the mortgage’s principal amount, interest rate or both, this loss may be less than what the bank would experience by foreclosing on the borrower and reselling the property. Mortgage modification can turn a less-than-ideal situation into a win-win.

Still, foreclosure was much more common than mortgage modification during the housing crisis because banks claimed they lacked the resources to handle the large number of modification requests. This meant many homeowners who probably would have qualified for mortgage modification were not able to get into a modification program and, instead, lost their homes to foreclosure. 

RELATED TERMS
  1. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...
  2. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  3. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  4. Forbearance

    A temporary postponement of mortgage payments.
  5. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  6. No-Appraisal Refinancing

    A type of mortgage for which the lender does not require an independent, ...
RELATED FAQS
  1. What do mortgage lenders use the securitization food chain?

    The phrase "securitization food chain" was made popular by director Chris Ferguson in "Inside Job," a film about the 2007-2 ... Read Full Answer >>
  2. Why do banks securitize some debts, and how do they sell them to investors?

    Banks may securitize debt for reasons that include risk management, balance sheet issues, greater leverage of capital and ... Read Full Answer >>
  3. Do mortgage escrow accounts earn interest?

    A bank is not required to pay interest on any escrow accounts (also mortgage impound accounts) it holds for its customers. ... Read Full Answer >>
  4. What role did securitization play in the U.S. subprime mortgage crisis?

    The securitization of subprime mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) ... Read Full Answer >>
  5. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  6. How does the loan-to-value ratio affect my mortgage payments?

    Several factors affect the mortgage rate you can obtain when you purchase a home. Lenders analyze credit histories and scores ... Read Full Answer >>
Related Articles
  1. Insurance

    Why You Don’t Need Mortgage Protection Life Insurance

    Mortgage protection life insurance sounds great in concept - a guarantee that your mortgage will be paid off if you die unexpectedly. But take a hard look at what you get before choosing it.
  2. Home & Auto

    How To Get Rid Of Private Mortgage Insurance

    Private mortgage insurance benefits the lender (the sole beneficiary of PMI), but it can add a sizable chunk to your monthly house payment.
  3. Personal Finance

    6 Critical Moves That Will Save You Time and Money Before Hunting for a Mortgage

    There are many important aspects to consider and research before the process of selecting a home even begins.
  4. Credit & Loans

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  5. Home & Auto

    Homeowners Still Not Getting Money From $25-Billion Mortgage Settlement

    Was the recent mortgage settlement really worth it for homeowners, or are they still getting the short end of the stick?
  6. Home & Auto

    Benefits Of Paying Off Your Mortgage

    Paying off your mortgage in a reasonable amount of time can result in financial security and freedom.
  7. Home & Auto

    Advantages And Disadvantages Of Using A Mortgage Broker

    Mortgage brokers may be able to find you the loan of your dreams, but you should consider the potential downsides before hiring one.
  8. Home & Auto

    Why People Are Having Difficulty Making Mortgage Payments

    Many Americans are having a tough time paying their mortgages. Here are some reasons why some homeowners fared better than others during the housing crisis.
  9. Entrepreneurship

    5 Steps To Qualify For A Mortgage If You're Self-Employed

    Qualifying for a mortgage is a little more complicated for borrowers who are self-employed.
  10. Home & Auto

    The Benefits Of Mortgage Repayment

    Buying a home may be the biggest debt you'll ever incur. Learn why you should retire it sooner, rather than later.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center