In an effort to help homeowners modify their mortgage loans, some lenders are taking steps to lower the principal amount, according to a new report from the Office of the Comptroller of the Currency (OCC). The report shows that while many lenders are taking the route of temporarily suspending interest to allow homeowners to catch up on payments, others have become even more lenient, lowering the amount of the principal owed for struggling borrowers.
The number of lenders taking this route has increased dramatically. In fact, from the first quarter to the second, the number of loan modifications involving a shift in the principal jumped from 3.1 to 10.1 percent.
There are a few reasons that banks are considering this option:
- Mortgage-servicing firms receive financial incentives for making modifications.
- Banks have more flexibility to modify loans because their balance sheets are starting to stabilize - and they're starting to raise fresh capital.
- "Taking the hit" now with a portion of the loss upfront is worth the possibility of having the remaining adjusted balance - with interest - paid in full down the line.
Of course, it doesn't hurt that the Obama administration has be putting pressure on banks to since the Home Affordable Modification program was put in place in March. Also, many banks simply saw that modifications weren't doing the trick; a whopping 56 percent of borrowers whose loans were modified in 2008's second quarter were default again a year later.
But experts say to not expect a principal adjustment as the first course of action from your lender. First, the lender will likely adjust or temporarily suspend your interest rate. If that doesn't work, the lender may extend the term of the loan. And finally, you may have some of the principal deferred.
Have you had a loan modification? Was part of your principal deferred in the process?
