What is a Mortgage Modification
BREAKING DOWN Mortgage Modification
Mortgage modifications are typically implemented as short-term solutions for homeowners facing a period of financial hardship without changing the overall terms of the loan.
For instance, a borrower may approach their lending institution for a mortgage modification to reduce their monthly payment by $100 for a year. At the end of the contracted period, however, those monies and associated interest remain due, meaning that the borrower will be held responsible for paying that $1200 plus interest in order to remain in good standing.
While there are many possible motivations for seeking a mortgage modification, it is a common tool to help homeowners avoid foreclosure on their property, especially for those who cannot or do not wish to refinance their loans.
Refinancing and mortgage modification differ in important ways. A refinance replaces an existing loan with another loan. Borrowers seeking refinancing have the ability to shop for better rates among different lenders, and in most cases borrowers must have good credit in order to qualify for refinancing. A refinance agreement will also usually include various fees, including closing costs in establishing the new mortgage agreement.
Those seeking mortgage modifications may be limited because of bad credit or because of declining property values, especially if the borrower seeks assistance because of a period of financial hardship. Mortgage modifications are contracted with the existing lender. Sometimes, the fees for establishing a mortgage modification are minimal or waived, making modifications somewhat more accessible.
Mortgage Modification Programs After the Subprime Mortgage Crisis
The 2008 subprime mortgage crisis in the U.S. led to a rapid decrease in property values, with many homeowners seeing the value of their homes drop below the balance of their mortgage.
Homeowners impacted by this crisis began to find themselves unable to refinance their mortgages in the wake of this crisis and take advantage of lower interest rates because the loan-to-value (LTV) ratio of their homes disqualified them from refinancing.
In 2009, the U.S. federal government launched two federal mortgage modification programs to assist homeowners caught in this crisis from losing their homes and equity to foreclosure.
The Home Affordable Refinance Program (HARP) was established to assist homeowners whose properties were underwater and ineligible for refinancing, and whose loans were either owned or guaranteed by Freddie Mac or Fannie Mae. Initially, HARP assisted homeowners with LTV ratios greater than 80 percent and less than 105 percent. HARP was subsequently extended to homeowners more deeply underwater, with LTV ratios in excess of 125 percent. Currently, HARP is slated to close at the end of 2018.
Concurrently, the Home Affordable Modification Program (HAMP) was also introduced in 2009 in order to assist homeowners at more immediate risk of foreclosure by providing loan modifications to reduce and fix interest rates, extend terms and reduce principal owed. HAMP ended in 2016.