Why Would A Bank Modify A Loan?

You see it in the news, on the internet, you hear about it on the radio. Even the banks are sending out letters about it before homeowners even ask. Loan Modifications. Simply defined, it’s when a lender changes the terms of a loan to help make it more affordable to the borrower. “Why would they do that?”

At first blush, it would seem counter productive for a lender to lower someone’s interest rate, or extend their term, or offer an interest-only payment period without any penalties. After all, these aren’t non-profit organizations, they are banks. The very ideal of capitalism. Well, it’s actually quite simple: It cost’s the banks less to modify a loan than it does to go through foreclosure.

From the bank’s perspective, with a large percentage of the population going through difficult times, the foreclosure rate has increased tremendously. This is putting a severe strain on the amount of capital they have on hand to lend, therefore having an effect not only on the losses they are seeing, but also affecting their ability to produce income. No new loans means no new interest payments or fees collected.

Rather than foreclose on a property and deal with the costs associated, and then most likely take a loss on the property once they are able to liquidate it, they can choose to modify a loan. By modifying, they eliminate the expense of foreclosure, and since they don’t have to re-possess the property, there are no losses due to depreciated value. They technically don’t lose anything, they just reduce the amount of profit they make on the loan. By doing this, they are helping themselves as much as they are helping the homeowner.

This doesn’t mean that the banks are going to mod every loan that comes calling, but it does mean that they are looking at all of them, and the odds are good that if you have a strong hardship, a desire to keep your home, and the ability to make payments, you can qualify for a modification.