After A Loan Mod (Or if Your House Is Upside Down) You Are Effectively Renting The Home From The Mortgage Company

Many homeowners with upside down mortgages are seeking a mortgage modification in order to lower their monthly mortgage payments. Under the government’s HAMP program, mortgage modification usually involves lowering the interest rate to 2 % intially and adding deferred interest and past-due payments to the loan principal.

Loan Mod companies are happy to take your money.    But, it seems that most people do not comprehend the practical reality of a mortgage modification. If you continue to live in a currently upside down house with a modified mortgage payment you are essentially renting the property from the lender. You are renting because it is unlikely you will see any profit when the house is sold unless there is an explosive recovery in real estate value. Even if real estate values were to inflate at a 10% annual rate, starting tomorrow, very few people will break even on their modified mortgage because the deferred interest and arrearage is continuously increasing the mortgage balance.  If you were upside down to begin with, it only makes matters worse.

“Renting” through a modification still makes business sense for homeowner and lender. If the homeowner did not modify the mortgage payment and could not afford to pay the mortgage the homeowner would face foreclosure, and after foreclosure the owner would have to rent an apartment or rent someone else’s home. It will take several years before the homeowner will qualify for a new home mortgage. From the lender’s standpoint, permitting the current homeowner to remain in the property in what is effectively a rental status is better than taking back the property in today’s real estate market.  You are essentially renting for the benefit of the lender - or until the market turns around.

I am not criticizing mortgage modifications. If you like your home and want to live in your home then you should modify the mortgage payment to something you can afford. Just be aware the for practical purposes you are on the same position as a tenant because you it is very unlikely that you will retain any home equity.