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Q&A: Why can't I get a loan modification?

Loan modifications are getting harder to come by.

Loan modifications are getting harder to come by. Photo Credit: Photos.com

Q: I am a Realtor and my husband was recently laid off. Our lender, which is one of the big-box lenders, put us on a forbearance plan until July 2011. I'm not sure why they did not give us a trial plan or a permanent loan modification. We need a permanent loan modification, as we have had a drastic reduction in income. We are scared of the forbearance as this means the lender can foreclosure on us at the end of six-month period. We have friends and they got a loan modification while they were on unemployment and don't understand why we can't get one.

A: While you may want a loan modification, it seems that most lenders have been rather reluctant to grant permanent loan modifications to their borrowers. In fact, only a very small percentage of borrowers have been helped by the federally sponsored loan modification programs.

Given that lenders aren't agreeing to many permanent loan modifications, your big-box lender has given you a different short-term option. The forbearance allows you to pay less than you ordinarily would have owed and then add what you did not pay to the loan balance in the future.

If you received documentation from your lender, that document would spell out your current payments, when you must resume making payments of a higher amount and the consequences if you fail to make those payments.

It seems that banks will try to do whatever they can to avoid modifying loans for their borrowers. In your case, you probably have made all of your payments on your loan and are making whatever payments you are required to make to the lender now.

If that's the case, the lender appears to have minimized any damage it would sustain from your financial problems. And that's the whole point of the program -- to minimize any financial damage to the lender, not the borrower.

If the bank gives you a loan modification, it potentially could get less income over the life of the loan. However, if it gives you some temporary relief, and you keep your loan, it minimizes its losses.

Given your financial situation, you might want to revisit the loan modification possibility with the lender. If the lender won't agree, it may force you to make a decision you were avoiding to make: to default on your mortgage and let the home go into foreclosure or sell your home. If you sell your home and the sales price exceeds the mortgage, the lender is made whole, but if your home is sold and the proceeds do not end up paying off the lender in full -- a short sale -- the lender will be worse off.

Unfortunately, sometimes the short-term benefit to the bank seems to outweigh the long-term benefits. In your case, if you were to obtain a loan modification and make all your payments for the balance of the life of the loan, the lender would suffer a loss of income compared to what it would get from your current loan. If you default or go into a short sale, that loss may exist and be larger than the loss from the modified loan, but I've given up trying to figure why lenders would rather see loans go into foreclosure or short sale rather than help borrowers out.

Ilyce R. Glink's latest book is "Buy, Close, Move In!" distributed by Tribune Media Services

Need some real estate advice? E-mail realestate@newsday.com.

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