Several million mortgages are currently in default or expected to become past due in the coming months. Some of those homeowners who are past due have lost everything in foreclosure, some are simply walking away before it gets to that point, and others are struggling to stay in their homes. For many homeowners in default to be able to stay in their homes, their mortgages must be modified. While some homeowners have received decent loan modifications, others have been surprised to find out only that they've been denied by their lender. As diplomatically articulated by the FDIC Chairman, Sheila Bair, the financial industry wants to avoid foreclosure by offering loan modifications only "when it is financially prudent to do so." (See a portion of the "Message from FDIC Chairman Sheila Bair" here.) Lenders are interested in modifying distressed mortgages, but only when the modified loan will be a "performing loan". In other words, they'll modify your loan if: (1) you can actually afford the modified loan and will pay it; and (2) the modification yields more money for them they'd make selling your home in foreclosure.

The FDIC Loan Modification Program manual explains some of the basic eligibility criteria participating lenders and servicers require in order for a homeowner to qualify for a loan modification.  Generally:

  • Modifications may be available for loans that are at least 60 days delinquent or where default is "reasonably foreseeable";
  • Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been discharged from Chapter 7 bankruptcy since the loan was originated;
  • The loan was not originated as a second home or an investment property;
  • The modified monthly payment (of principal, interest, taxes, and insurance (PITI)) is within the allowable 31-38% housing-to-income (HTI) ratio;
  • The terms of the modifcation are less costly to the bank/investor than a foreclsoure.

For a thorough explanation of the considerations taken into account by the financial industry when reviewing a possible loan modification, read the FDIC manual by clicking here.