Loan Modification: Is It Worth The Price?

by Ralph Roberts

Hiring an attorney to negotiate a loan modification can be an expensive proposition, possibly costing thousands of dollars. It isn’t something that many homeowners feel they can afford right now. When you take a closer look at the numbers, however, the cost of a loan modification compared to the cost of foreclosure is a pittance:
• $151,000: estimated cost of a single foreclosure (Joint Economic Committee of Congress)
• Homeowner: $7,000
• Lender: $50,000
• Local government: $19,000
• Impact on neighboring home values: $75,000
• Estimated total cost of one foreclosure: $151,000
• $3.3 trillion total decline in property values in the U.S. in 2008 (Zillow)
• 1 in every 6 homeowners owe more on their homes than their homes are worth (Zillow)
• 11.6 percent reduction in the median home price to $192,119 (Zillow)
• 1 out of every 200 homes will be foreclosed upon (Mortgage Bankers Association)
• Every 3 months, 250,000 families enter into foreclosure (Mortgage Bankers Association)
• 1 child in every classroom in America is at risk of losing his or her home (NeighborWorks America estimate based on numbers from Mortgage Bankers Association)
• 43 percent of American households spend more than they earn each year (Homeownership Preservation Foundation poll of 60,000 homeowners)
• 52 percent of employees live paycheck- to-paycheck (The MetLife Study of Employee Benefit Trends)
• Nearly 42 percent of all American households do not have enough in liquid financial assets to support themselves for at least three months, and 46 percent of American households have less than $5,000 in liquid assets, including IRAs (Asena Caner and Edward N. Wolff, “Asset Poverty in the United States: Its Persistence in an Expansionary Economy,” Levy Economics Institute of Bard College).

Compare these numbers to the costs and benefits of obtaining a loan modification:
• $4,000 or less is the cost of having attorney who specializes in loan modification negotiate an affordable solution for catching up on missed payments and lowering the monthly payment
• 68 percent: the percentage of low- and moderate-income borrowers who are less likely to lose their homes when they enter a repayment plan (Dona Dezube, “Heroic Homeownership,” Mortgage Banking, June 2006, page 82)

Some may argue that we overlook the cost of a loan modification to the lender or investor who sees a loss in revenue as a result of lowering the homeowner’s monthly mortgage payment. This is true – no doubt about it, a single loan modification can cost a lender tens of thousands of dollars in lost revenue. A loan modification is not a profitable proposition for lenders – it’s a loss mitigation tool for paring down the lender’s potential losses.

If the lender does not agree to a loan modification and proceeds with foreclosure, there is no revenue to speak of, and the lender has to cover the cost of foreclosure (by some estimates $50,000 to $80,000 per foreclosure). This is the very reason that lenders are often willing to consider a loan modification – for cases in which the alternative would be worse (more costly). A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure.

Homeowners also stand to benefit – by keeping their homes and paying less per month and over the life of the loan. Even if the homeowners were to pay $4,000 for a loan modification that lowered their house payment a modest $150 a month, the loan modification would pay for itself in a little over two years. Over the course of ten years, it would save them $14,000 over and above the cost of hiring a professional!

Anyone with a calculator can plainly see that the potential savings from a loan modification are well worth the cost – for both lenders and homeowners.

Reprinted with permission from Realty Times, March 23, 2009, realtytimes.com