The last few years of the past decade have been treacherous and full of hardships for many people from all walks of life. Most industries in the United States have been negatively impacted by the global financial crisis. However, one particular industry piqued my interest and as such therefore, I will discuss briefly the mechanics of the housing industry.

A substantial percentage of the US residential housing is upside down. This means that the owner owes more than the market value of their home. This might be viewed as a negative thing because the owner will make a loss in the event that the house is sold and in addition to losing the home, the proceeds from the sale of the house will be insufficient to cover the loan hence the owner will still be under obligation to cover the balance.

As a result of the upside down status on the loan, what incentive does the owner have to continue servicing the loan? One might argue that the fear of losing shelter might prompt one to continue making payments and also, if one’s intention is to live in the house for the long haul then the house’s current value is of little or no concern to the homeowner. Therefore, upside down or not upside down bears no impact in the overall scheme of things.

In order to provide some form of assistance to the struggling homeowners who have upside down homes, the Obama administration intends to make use of the loan modification strategy which in my opinion does little in the way of providing a long term solution. The strategy only offers a temporary fix to the problem. Mortgage modification refers to a situation whereby a lender modifies the terms of a homeowner’s loan to lower payment.

The reason why loan modification offers a temporary solution is because most of the modifications last only up to five years. Thereafter, the lender is at liberty to revert to the original loan terms. What happens then? The same chain reaction that happened recently might be repeated all over again and another financial crisis might be triggered as a result of the chain reaction.

In addition to being a short term solution with no long term guarantee of protection, mortgage modification might not be the best option because according to a top banking regulator, almost 53 percent of the loans modified in the first quarter of 2008 went bad again within six months. 53 percent is quite a high percent to be ignored or overlooked.

Therefore, the continual use of the loan modification strategy has certain negative implication that is quite telling of the administration’s ability to solve key problems. Failure to learn from past mistakes is inexcusable to say the least and if the administration pursues the same strategy regardless of the fact that loan modification is ineffective, this goes to show that history always has a way of repeating itself.

Furthermore, the loan modification program might not work because the program does not address the up side down issue effectively. In spite the fact that monthly payment will potentially be reduced, the program does not go far enough to reduce mortgage principle. Monthly payment will be reduced through interest reduction and term extensions. However, the principle will not be reduced under this program. Since this is the case, how then is the gap between loan value and market value closed? The key to reconciling the differences in value lies in reducing the principle to match the current value of the house.

A key component of the mortgage modification program is the selection process. I acknowledge the fact that a selection mechanism system is important to the extent that it is efficient and reliable but if this is not the case, then the benefit will be outweighed by the cost and the program will be rendered useless. It is important to establish eligibility guidelines for example providing proof of financial hardship.

Such a move requires a homeowner to provide documents that show loss of income etc. However, since the Federal Government has a reputation of often times being slow and bureaucratic, getting instant assistance under the mortgage modification program will be a mirage of a dream for many. Struggling homeowners will be required to master the skill of patience and positive thinking. Otherwise, they will flounder in despair because the mortgage modification process will be too time consuming and bureaucratic.

From a personal perspective, the Government should lay a greater emphasis on long term solutions to the housing industry problems as opposed to short term solutions that only work temporarily. A well thought out plan is vital to the future prosperity of the country. In as much as it is important to solve current problems through any means necessary, it is also equally important to keep an eye on the future as well. Therefore, the drawing board needs to be pulled out once more.

What is loan modification?

A modification made by a lender to an existing loan in response to a borrower’s long-term incapability to reimburse the loan. Loan modification agreement typically involves a reduction in the interest rate on the loan, a different type of loan, an extension of the length of the term of the loan, or a combination of any of the three. A lender may be open to modifying a mortgage because the cost of mortgage modification may turn out to be less than the cost of default or foreclosure. There are many loan modification companies that negotiate with the lenders to get the borrowers a fair deal. A loan modification attorney from the company will handle the homeowner’s case. The attorney bargains with the lenders for lower interest rates, exemption from penalties, and late fees.

In principle, a mortgage loan modification should not affect the credit scores of the borrower negatively. The lender has accepted to change the terms of the loan. And if the borrower remains current on the loan with the new terms, then chances are those credits scores may improve. However, if the reason for a debtor applying for mortgage modification is defaulting, then it will affect credit rating. Americans seeking loan modifications under Obama’s Home Affordability program must go through a three-month trial phase, wherein they have to make installments according to the new terms. This federal program was aimed at homeowners facing foreclosure. With reduced interest rates and longer repayment period, low mortgage payments are guaranteed. However, there were many misunderstandings regarding these trial payments. A new credit code is being put into practice to deal with the problems.

Refinancing and short sale

‘Refinancing’ usually means paying off the existing mortgage by taking a new, cheaper one. So, there can be no instances of negative impact on the credit. However, it may affect adversely if the borrowers applies for a much bigger loan compared to the existing mortgage. Short sale is the process when the lender permits the homeowner to sell the assets for less than the balance owed on the loan, so that foreclosure can be avoided. It will be documented as a debt write-off for the next seven years, same as in foreclosure.

In all probability, a home loan modification will surely not affect one’s credit scores negatively. Hence, it is a safe method to clear off debts.

With the economy as bad as it is, the number of people that are in need of financial help has increased significantly. For many individuals that are struggling to pay off large mortgages, it can be very helpful to get a mortgage loan forbearance. Making use of this financial option is especially useful to some because they are able to avoid an immediate payment date and save up their money to pay it off later. People that are in need of these types of loan agreements are generally those who are without a strong source of income.

For example, if you have a large family and are spending a lot of money to support your kids going through school (e.g. new clothes, school books, etc.) and you also have a mortgage to pay, things can get tough. Plus, shopping for food can put even more strain on your finances if you have many people to feed. If you have a large amount of money being spent towards a mortgage, then the rest of your life may suffer. In order to give yourself extra time to get the money that you need to pay your mortgage, you can contact your banker and ask if you could get a loan forbearance.

The process of getting a forbearance of mortgage is not at all complicated, in fact, it is quite basic. All that you need to do is schedule to meet with the loan officer at the company from which you took out your mortgage. When meeting with them to discuss your mortgage, ask whether you could be granted a forbearance for various reasons. If he or she does not agree to give you one (for whatever reason), then do not be afraid to ask about refinancing. When you refinance, you set yourself up to pay less money because you end up getting a much lower interest rate out of the deal.

Essentially, you are just delaying the payments that you would normally get with a forbearance – it is not complicated. If you were a reliable customer through your lender in the past, then there is absolutely no reason that you will not be able to get one. There are a few factors that are going to reduce your chances of getting one, but for the most part, it should not be very difficult. If your reason for requesting a forbearance was due to some sort of hardship that you have gone through, it would probably be a good idea to write a hardship letter.

For those people that just need a couple of extra weeks to come up with the necessary funds to pay off their mortgages, it would be a good idea to ask about forbearances. Not only are they very good in hard financial times, but they can help prevent you from going into deep debt, or even worse – bankruptcy.