SBA Loan Workout: Mortgage Modifications Do Not Work

The issue is complicated; people want to hold on to their homes. They want to pay their mortgage debt. They need to restructure their loans so they can afford to pay. They are attracted to a mortgage modification, and believe this will save the day. Unfortunately, the statistic are quickly revealing, a huge percentage of mortgage modifications are defaulted on a few payments into the new program, enough to cause one to wonder why all the rush to modify, this plan does not really work.

Statistics are quickly emerging that upwards of 40% of mortgage modifications are defaulting within the first year. What is wrong here, why is this happening and what does it mean?

1. The bottom line speaks loud and clear, many cannot afford any mortgage payment at all, they have probably lost their job and are merely buying time, hoping that by the time the mortgage modification occurs, they will find a new job...a plan that has failed many, many times, unfortunately. Unemployment is a killer of modifications, and until this issue is resolved, mortgage modifications will not work.

2. The second largest problem is the walk away. Even after the mortgage is modified, the borrower realizes the value of the mortgage far exceeds the value of the house and, thus, there is no good reason to continue paying on this investment as there will be no return to the owner...ever.

The fact remains, in either situation, the debt is too large to carry and no form of modification will change this reality, so what is the point of it all?

The only resolution is a reduction of debt. Unfortunately, this occurs only with a short sale which requires you to lose your home. The banks have yet to embrace a short refinance, in which the borrower pays off the current bank with a reduced amount through a short refinancing through another lender and, thus, stays in the house. A great idea but it's time has not yet come.

It's a matter of dealing with the problem not the symptoms. The problem is too much debt, not the terms and conditions. Yes, reduced interest and longer amortization may reduce the monthly payment but this is not the cure for the problem. Debt forgiveness is the only solution.