Loan modifications have become common since the mortgage crisis began in 2008 to 2009. At that time, interest rates were high, but unemployment was low. Homeowners managed to stay in their homes by refinancing every couple of years. Qualifying for a new loan was not a problem with late payments on their credit reports. Property values were increasing so there was plenty of equity.
PMI
If you purchase a home or refinance an existing loan, and you borrow more than 80 percent of your home's appraised value, lenders require you to obtain private mortgage insurance (PMI). This insurance protects the lender by guaranteeing a portion of the loan if you are unable to pay and you lose your home to foreclosure. Foreclosure risks are higher if the loan amount exceeds 80 percent of the appraised value.
Loan Modifications
Property values began their decline around 2009, and it became difficult to refinance. Loan amounts suddenly exceeded 80 percent of a home's appraised value, and it was all but impossible to qualify for PMI. Interest rates began to decline, but unemployment began to rise. Lenders introduced loan modification loans that allowed lenders to offer loans over 80 percent of a home's value, at a low interest rate. The new loans did not require PMI, unless it was required on the original loan. Lenders started offering these loans if you were 90 days or more behind in your mortgage payments.
Lender Guidelines
Property values continued to decline, so lenders began offering loans up to 125 percent of appraised value without PMI. In addition, lenders lowered interest rates below market rates, so borrowers could afford the monthly payments. If necessary, loan terms were extended to 40 years, and lenders added delinquent payments to the principal, so that arrearages could be made up over the life of the loan.
Considerations
Loan modifications helped, but they were not the answer everyone hoped they would be. Property values continued to fall, and unemployment continued to rise. The combination prevented many people from qualifying for loan modifications. Loans exceeded 125 percent of value, and unemployed people could not afford the payments, even if they could get a loan modification. Short sales became popular. When you sell your home through a short sale, your lender allows you to sell it for its current market value, regardless of your mortgage balance. Lenders decided this would make sense financially because of the costs involved in foreclosing and selling your home through an auction.
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