Will Loan Modification Solve Mortgage Problems?

A substantial percentage of the US residential housing owes more than the market value of their home. As a result of the upside down status on the loan, what incentive does the owner have to continue servicing the loan? One might argue that the fear of losing shelter might prompt one to continue making payments and also, if one's intention is to live in the house for the long haul then the house's current value is of little or no concern to the homeowner. Therefore, upside down or not upside down bears no impact in the overall scheme of things.

In order to provide some form of assistance to the struggling homeowners who have upside down homes, the Obama administration is using a mortgage loan modification strategy which in my opinion does little in the way of providing a long term solution. The strategy only offers a temporary fix. Mortgage loan modification refers to a situation whereby a lender modifies the terms of a homeowner's loan to lower payment.

The reason why mortgage loan modification offers a temporary solution is a loan modification can last only up to five years. Thereafter, the lender can revert to the original loan terms and the same chain reaction that happened recently might be repeated all over again.

Mortgage loan modification help might not be the best option because according to a top banking regulator, almost 53 percent of the loan modification in the first quarter of 2008 went bad again within six months. 53 percent is quite a high percent to be overlooked.

Therefore, the continual use of loan modification has is quite telling of the administration's ability to solve key problems. Failure to learn from past mistakes is inexcusable. It appears loan modification is ineffective, this goes to show that history always has a way of repeating itself.

The loan modification program might not work because the program does not address the up side down issue effectively. In spite the fact that monthly payment will potentially be reduced, the program does not go far enough to reduce mortgage principal. Loan modification helps interest reduction and term extensions. However, principal will not be reduced there loan modification services. Since this is the case, how is the gap between loan value and market value closed? The key lies in reducing the principal to match the current value of the house. Loan Modification Companies are missing this point.

A key component of mortgage loan modification is the selection process. A selection mechanism system is important to the extent that it is efficient and reliable but if this is not the case, the benefit will be outweighed by the cost. It is important to establish eligibility guidelines.

Such a move requires a homeowner to provide documents that show loss of income etc. However, since the Federal Government can be slow and bureaucratic, getting instant assistance under the mortgage loan modification plan will be a mirage for many. Struggling homeowners must master the skill of patience and positive thinking. Otherwise, they will despair because the mortgage loan modification process will be too time consuming.

Government should lay a greater emphasis on long term solutions as opposed to short term solutions A well thought out plan is vital to future prosperity. Therefore, the drawing board needs to be pulled out once more.