Home Loan Modifications

Home Loan Modification Myths with Obama’s Making Home Affordable Act

There’s been a lot of talk about loan modification lately. Did you know that home loan modification has always been around? It has – but it hasn’t received nearly as much publicity before the economic crisis hit the housing market so hard in recent years. Loan modifications are becoming much more common than they used to be, but people still hold a lot of home loan modification myths.

The Obama administration recently signed into law the Making Home Affordable (MHA) plan, which provides lenders with a standard procedure for modifying home loans when homeowners are having trouble making payments. Until the end of the year 2012, people can modify their loan terms via the MHA’s Homeowner Homeowner Stability Initiative.

The $75 billion initiative goes to paying incentives to both lenders and borrowers for working out acceptable loan modifications. Incentives for lenders make them much more likely to consider a loan modification, because foreclosure is really not all that profitable anyway. When you factor in the incentive payments, loan modification is looking like a pretty good alternative to foreclosure from a lender’s point of view. This is how the MHA plan aims to reach 4 to 5 million homeowners who need to modify their loans.

Even though the plan is already in effect, lots of people still hold false beliefs about the MHA loan modification process. A lot of people think that the government is making lenders abide by their modification terms and perform modifications against their will. Nothing could be further from the truth. The government gives lenders a procedure for adjusting eligible loans and provides incentive payments for adjusting them under the MHA plan.

But lenders only participate when they want to, and if they decide that foreclosing is still more profitable than modifying a loan they are encouraged to go through with it. The catch is that they usually won’t do this – foreclosure as a general rule is a financial burden for lenders and they’d rather avoid it if at all possible. Add to that the financial incentives from the MHA plan, and they usually want to modify the loan as much as the homeowner does.

Another myth about MHA modification is that the government is going to be helping house flippers and speculators. With the money from the Homeowner Stability Initiative, 100% of it will go to people who actually live in their homes. The goal here is to keep people in their homes, not to aid investors who have gotten stuck in the bad housing market. The MHA plan is only interested in keeping people from having their homes taken away from them. A credit check has to prove that you actually are the primary resident of the house before you can get a loan modification on it.

During this time of unsteady financial waters, it’s natural that there would be lots of uncertainties surrounding the home loan modification process. People are still learning about the new MHA plan and how it works, and hopefully in time these myths will be dispelled.