What Is Better to Stop Foreclosure - Repayment Plan or Mortgage Modification

By: Nick Adama

When homeowners on their own negotiate with a lender for a loan modification to avoid foreclosure, the owners typically end up with a repayment plan instead of a modification. The differences between the two plans, however, could not be more drastic, and homeowners rarely benefit from a repayment plan as they would under a more specialized mortgage modification agreement.

The main aspect of a repayment plan is both a benefit for banks in the short term and a huge drawback for homeowners. Essentially, this solution to foreclosure allows homeowners to pay back the amount they have fallen behind in monthly payments over a period of time (for example, six months), while still keeping on top of the current payment. The terms of the loan are not modified at all, but the foreclosure process is halted.

While some homeowners who have recovered from a financial hardship and actually ended up with a higher income in the end will be able to afford such a repayment plan, most borrowers make a few payments and go back into default. Because the terms of the mortgage remain the same, and the original monthly payment is unchanged, homeowners have to pay more each month under a repayment plan than they were paying before.

Once homeowners fall behind on the bank’s plan, the foreclosure procedures start up again and the borrowers are left to face the situation with one fewer option, more late fees and legal expenses charged to their account, and a lender unwilling to offer them any other solutions. Banks, once a borrower has failed to make their regular payments and then failed at a repayment plan, typically offer little else to help stop foreclosure.

While a properly done mortgage modification could help a large number of homeowners facing foreclosure, for some reason, banks shoot themselves in the foot over and over again by offering repayment plans. These plans are typically too expensive for the family and they end up right back in foreclosure after just a couple of months. In fact, some homeowners are only able to make one payment before falling behind again.

Why lenders offer these solutions instead of providing real assistance to borrowers, though, should be obvious for anyone following the news. There are two main reasons that banks do as much as they can to avoid modifying loans, and why they only offer repayment plans or bad loan modifications if they offer any options at all to their clients. They both have to do with the solvency of the banking industry.

First, if banks modified a loan, it would make the loan less profitable. A loan at 9% interest looks a lot more inviting to a potential investor than a loan at 3% interest. If banks were marking down mortgages to their current market levels, they would have to recognize far greater losses in the short run. So they have adopted a policy of offering repayment plans to borrowers in order to keep losses off the books for an extra couple months.

Second, banks are using repayment plans and the failure of their typical modification programs as political cover. Every time they offer a plan to avoid foreclosure to a family who can not afford it, banks receive two benefits. The lenders are able to tell politicians and the media they are offering plans to borrowers, and they are able to show the failure of these programs when begging for more bailout money. Heads, the bank wins; tails, the taxpayers and homeowners lose.

Too often, banks offer their shoddiest, most expensive repayment plans to homeowners who are negotiating on their own behalf for a solution to foreclosure and who will take any option they can get to avoid a sheriff sale or eviction. But in too many cases, the end result is the same — the plan is impossible, the homeowners fall behind, the foreclosure starts again, and now there are even fewer options to save the home.

Nick writes articles designed to help consumers understand how various methods to stop foreclosure operate, and which may be most effective for their circumstances. He writes about such topics as how to find the right personal bankruptcy lawyer, the possibilities of a deficiency judgment after foreclosure, how to stop a sheriff sale, and more. Visit his site if you need help understanding how foreclosure and bankruptcy work, and what other solutions you should consider when the mortgage company is attempting to take your property: www.mypersonalbankruptcylawyer.com/

Article Source: http://www.articlecloud.net (Published: May 2009 - Image: www.nurido.at)