Mortgage loan modifications: More banks offering reduction in principal

Many economists have long maintained that the only way for mortgage loan modifications to really work is for banks to reduce the actual principal rather than just the interest payments, which tend to simply prolong the torture for many and increase the amount they owe. Getting most lending institutions to do this has been difficult, if not impossible.

This may be starting to change. Best for you to be armed with some key information.

A brand new government survey is showing that 13% of loan modifications in the third quarter of this year "offered a reduction in the principal balance," reports the Christian Science Monitor. That is an increase.

Here's the catch (come on, you knew there had to be one, right?) -- the banks offering the reductions in principal tend to be the ones that actually own the mortgage on the house; mortgages owned by a group of investors usually did not have their principal balance reduced, says the report.

That's too bad, because there is a fairly high default rate for modified loans (the interest-only variety) -- more than 50% within six months.

That is why it is essential you do everything you can to try and learn who actually owns the mortgage on your home, the lending institution or a pool of investors?

Sometimes that is easy to figure out -- the bank should be able to just tell you. But there have been many reports from across the country these last several months of people who claim their banks could not tell them who actually owns the mortgage, leading to more worry, confusion and, of course, risk of ultimate foreclosure.

But if you do learn that your bank is the sole owner of your mortgage, you need to stand your ground and insist that any meaningful mortgage modification will require a reduction in principal and not just interest. The figures indicate that banks are increasingly going along with that.

Why should they? And, why should someone have their loan amount reduced when others are paying the full amount and on time?

Simply because it makes good economic sense in the long run: Living on a block with surrounding homes in foreclosure is not going to raise property values, it will only make matters worse for everyone else in the neighborhood.

And now, it would appear, more and more banks are coming to the same conclusion.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think, The Menace of Media Speed and the 24-Hour Media Cycle."
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