Mortgage modification is a process where the terms of a
mortgage
A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
are modified outside the original terms of the contract agreed to by the lender and borrower (i.e.
mortgagee and
mortgagor in mortgage states;
Trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, refers to anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility for the ...
and
Trustor in Trust Deed states). In general, any
loan
In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
The document evidencing the deb ...
can be modified, and the process is referred to as loan modification or
debt rescheduling.
Background
In the normal progression of a mortgage, payments are made according to the loan documents until the mortgage is paid in full (or paid off). The lender holds a
lien
A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...
on the property, and if the borrower sells the property before the mortgage is paid-off, the unpaid balance of the mortgage is paid to the lender to release the lien. Any change to the mortgage terms is a modification. Changes may include any of the following: a reduction of the yield (commonly referred to as the
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
), an extension of the payment term, such as extending a 30-year term to a 40-year term, or a reduction of the
principal balance
The principal balance, in regard to a mortgage, loan, or other debt financial contractual agreements, is the amount due and owed to satisfy the payoff of an underlying obligation. It is distinct from, and does not include, interest
In finance ...
of the loan.
In the United States
Following the 2007 real estate recession, the government mandated the program,
Making Home Affordable (MHA), and its loan modification aspect,
Home Affordable Modification Program (HAMP) became the answer for both the struggling borrower and the lender. The lender is motivated to offer modification under this program by the expectation that a loan in default will become a performing (current) loan which will be more valuable than the proceeds obtained from a foreclosure sale, along with receipt of financial incentives from the government. The borrower, on the other hand, receives a fixed interest rate, a lower loan payment, often an extended term, and sometimes a principal reduction (if the property is
upside down).
In Canada
The emergency loan-modification options give homeowners the potential to extend
amortization periods on their homes if experiencing significant financial hardship or
foreclosure
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...
. These options can offer extensions up to a 40-year amortization, if a 15-year extension is granted on a previous 25-year amortization mortgage.
See also
*
Home Affordable Modification Program
*
Loan modification company
References
External links
MakingHomeAffordable.govHardest Hit Fund
{{DEFAULTSORT:Mortgage Modification
Loans
Mortgage
Personal finance
Valuation (finance)