Are Loan Mods Just Another Exotic Mortgage?

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This is a great question and I’m not the only one asking it.  The following article challenges the view of loan mods as a long term solution.  It is said that when the “step up” interest rate settles after 5 years in its permanent place, there will be hell to pay again and that most homeowners will be back at square one, unable to afford their payments.  Others argue that within 5 years we should be back to appreciating real estate markets and folks will be in strong equity positions.  Not to be negative, but personally, I believe we have a long way to go down and I don’t expect a recovery to start until 2013–I said, start in 2013.  Consequently, I believe the best solution is to get into an equity position as quickly as possible and a principal reduction program is the way to go.

The following is an excerpt from the Wall Street Journal article by Nick Timiraos.

The Obama administration’s effort to modify mortgages is heading into overdrive in a bid to make sure that borrowers who have received trial loan modifications can have that workout made “permanent.”

So far, most criticism on the Home Affordable Mortgage Program, i.e., HAMP, has centered on why so few borrowers with trial modifications are converting into permanent modifications. The common refrain from loan servicers is that they haven’t been able to get paperwork from borrowers to help finalize the loan modification — important because servicers get paid for each mod, and need to prove that borrowers actually face hardship.

But at ForeclosureRadar’s blog, Sean O’Toole raises a different, potentially more problematic issue: “Permanent” loan modifications last for only five years. He posits that reason for the low uptake of the loan modification program:

Maybe borrowers have figured out that this program is really only another exotic mortgage like one they fell prey to when they bought or refinanced the house that resulted in their current predicament. HAMP and the administration’s newly announced campaign isn’t digging borrowers out of a hole. It’s only digging them a new one, and delaying the inevitable.

To be sure, the five-year period tries to give borrowers a lifeline—a chance to get their life back on track. In five years, the thinking behind the plan goes, more borrowers may be financially whole again, able to make their mortgage payments, or, if housing prices have stabilized, some may be able to refinance or sell their homes.

To read the complete article, click here….

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