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Study Shows Mortgage Loan Modifications Work Best to Prevent Defaults When They Lower Payments

April 15, 2009

A new study from the University of North Carolina at Chapel Hill's Center for Community Capital shows that not all mortgage loan modifications equally effective. According to a press release from the center, the study analyzed data from 10,000 loans that were modified to prevent default and foreclosure; many of them were subprime or adjustable-rate loans made between 2005 and 2006, at the height of the housing bubble. Looking at their outcomes, the study concluded that homeowners who ended up with reduced payments were 13% less likely than people who got increased payments to default again. That was true even after looking only at homeowners with similar situations and risks. And people whose loan modifications included changes to the principal owed were 19% less likely to default.

Those conclusions may seem obvious from the outside -- after all, reducing payments makes them easier to afford. But the study (PDF) contradicts long-running practices by the lending industry. In a "traditional" loan modification, banks add the homeowners' late fees and past due amounts -- and the payment actually rises in many cases. As you might imagine, this doesn't help homeowners who got behind in payments for financial reasons. In the study, one-third of the homeowners who got modifications ended up with increased payments. And those who got traditional modifications had a 60% higher default rate than people who ended up with payment reductions. The press release called writing down the principal of loans a "crucial tool" to stop defaults.

As Fullerton mortgage loan modification attorneys, we think this is great news -- if policymakers and lenders are listening. We represent many homeowners who need mortgage loan modifications to stay in their homes -- and in some cases, we must represent them aggressively because banks are so reluctant to change the terms of their loans. Part of the problem is plain old fear of losing profits, but another part is that many loans aren't entirely owned by the lender who originally made them anymore. Instead, they've passed through third and fourth parties' hands or been "securitized" into investments owned by many people. Banks are reluctant to rock the boat with these other parties, not least because they could be sued if they do something to reduce the value of the investments.

Based in Anaheim, Howard Law LLP represents clients throughout Southern California who need help staying in their homes. Our Chino Hills mortgage loan modification lawyers have had substantial success renegotiating the length, interest or even the principal due. We also represent clients who are considering consumer bankruptcy and sue on behalf of victims of predatory mortgage lending. If you or someone you care about is struggling to make a mortgage payment, we may be able to help. To set up a free, confidential consultation with our Yorba Linda loan modification lawyers, please contact us online or call 1-800-872-5925.