Homeowners whose purchase-assist loans are modified to avert foreclosure are defaulting within six months, unless the principal amount is reduced to the value of the property. Lenders, however, resist any notion of a reduction in the principal owed on mortgages. The typical loan modification eventually raises the amount of loan payments, and is agreed to in exchange for the addition of delinquent amounts to the loan balance.
This seemingly profitable path for the lender leads to greater negative equity for the borrower, and leaves the borrower paying a dead-end loan with small chance of the property value recovering in the next six to eight years. All this inverted financing is more than enough incentive for many homeowners to again exercise the put option in their trust deeds by defaulting on payments, thereby forcing the lender to buy the property and cancel the loan as satisfied. Default end’s the buyer’s debt at no further cost to the buyer, with the additional benefit of rent-free living for the buyer until the lender acquires the deed.
Re. “Just a Band-Aid on the Foreclosure Problem?”, from Washington Post