I actually met a client yesterday who had negotiated the modification of her loan . Interest rate reduced to 2% for 2 years; 4% for 2 years; and 6% thereafter. Arrearages added to principal.
If that’s all you knew you might think that lenders were serious about making modification work. The remaining fact is that the client now has an $839,000 debt on a house now worth $575,000.
The modification did nothing to make it economically rational to keep paying on this loan. The house must gain a quarter of a million dollars in value before the house could be sold simply to pay off the mortgage. The payments go up and, for reasons personal to this client, her income is unlikely to increase at the same rate.
So, in my cynical view, all the lender had done here is postpone the train wreck for a couple of years, perhaps when the market isn’t so depressed with a flood of foreclosures. And in the meantime, it can congratulate itself on its “successful” loan modification program. Or, when this deal craters, it can say that modifications are doomed anyway.
Certainly, superficial loan modifications are doomed. That I will agree with.