How does a modification work?Unlike refinancing, a loan modification changes the terms of the original note. While it has always been possible to modify the loan, Sahnger and Walker agree that the housing crisis has prompted banks to deal more with distressed homeowners.
"First, homeowners have to understand that the mortgage company doesn't want (its) house back. Foreclosure ... is the most expensive solution for them," Walker says. "The second fact is that they will take back your house if they need to."
Then what's on the table? Just about everything, Sahnger says.
That can mean a reduction in the loan principal, but more often it's an interest rate reduction. In other cases, the lender may simply offer lower monthly payments by extending the life of the loan, he says.
For those who can't get a modificationDespite a growing number of options and increased flexibility by banks, the housing crisis likely will cost many people their homes. When that happens, homeowners have a tough choice to make, and many are choosing a delaying strategy.
Hokanson says one common tactic is to demand that the bank produce the original note. That can be difficult because many notes have frequently changed hands. But asking for the note is only a stopgap measure.
In New York, attorney Luigi Rosabianca says he's heard of homeowners simply using court-ordered hearings such as New York's mandatory pre-foreclosure conference between the bank and homeowner as a means of delaying.
"There's such a backlog these days that homeowners can stay in their homes an additional nine months or so just by requesting a hearing," he says.
Walker says a final alternative to losing the house is to seek a deed in lieu of foreclosure, which effectively returns the title to the bank and extinguishes the mortgage debt.
"A deed in lieu of foreclosure isn't a great choice, but for some people that's the only option left, and it's a lot better than having the bank foreclose because the impact on your credit isn't as bad," he says.
But homeowners looking to walk away need to make certain that their state has anti-deficiency laws that protect borrowers from having to pay back mortgage debt after they've lost the house, Hokanson says. Anti-deficiency laws typically apply only to purchase-money loans, which is money lent by the bank to buy the house. That means that debt from a home equity loan or a second mortgage may stay with homeowners who pursue a deed in lieu of foreclosure.
Will bankruptcy help?Homeowners who declare bankruptcy will stop the foreclosure process. But the automatic stay a court imposes on creditors will only last as long as the bankruptcy proceeding, and whether a homeowner is allowed to keep the house will depend on the specifics of their case, Hokanson says.
Once the bankruptcy begins, the homeowner will have to propose a plan to get back on track. But if they want to keep the home, they'll need to get current on their mortgage payments and demonstrate the ability to stay current.
Hokanson says if a homeowner can't show that he or she can live up to the bankruptcy plan, the judge will allow the foreclosure to go forward. However, the mortgage debt will likely be forgiven.
What about a short sale?A short sale seems like a simple solution. If you can't afford to make the payments, find a buyer who can. And in fact, short sales have long been a means of salvation for struggling homeowners.
Some homeowners can convince the bank to accept less than the value of the mortgage, provided they can sell the home quickly, says Travis Hamel Olsen, president of National Short Sale Center in Scottsdale, Ariz.
"The bank is trying to lose the least amount of money by agreeing to the short sale, and so they 'incentivize' the homeowner to conduct a short sale by minimizing the credit damage," Olsen says.
Olsen says short sales typically take 60 days or less, but critics argue that the sheer size of the housing crisis limits the effectiveness of this tool, especially for homeowners living in areas hardest hit.
For those who do pursue a short sale, Olsen says it's best to start right away, and it's critical to keep up appearances to help attract a buyer. He also recommends working as closely as possible with the bank to make certain that a purchase offer is accepted in a timely manner.
To find out more, read "Mortgage modification scams."