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Question: Are lenders required to modify my mortgage?
Answer: No. Loan modification is voluntary on the part of the lenders. The bank will analyze your financial capability to continue paying the loan once it is modified. They also review your hardship to justify modifying your loan. Before modifying a loan, many banks offer a trial forbearance of three months before offering loan modification. The reason is they want to be sure that you can still pay your mortgage once it is modified.
Question: Why did the banks get bailout money and yet they do not want to modify my loan?
Answer: The first bailout money is called "TARF" which is a form of loan to the bank to survive their lack of liquidity, and it has nothing to do with loan modification. The other program is called "incentive" which is available to the bank if they actually modified your loan. The government reimbursed the bank for a fraction of the loss actually incurred by the bank in modifying your loan. The incentive is about 50 percent of the total loss. The other 50 percent is absorbed by the bank.
Question: Are banks required to modify my loan based on 31 percent of my gross income as stated in the Obama plan?
Answer: Again, the banks are not required to follow the Obama plan to the letter. They have their own guidelines in loan modification. Most mortgages are owned by institutional or private investors. The banks are only acting as servicer or agent. If they believe they will incur lower losses in foreclosing your property they have the option to do so.
Question: Are banks required to lower the principal balance of my loan?
Answer: Many banks do not reduce principal balance. They only give reduction in interest. A few banks give principal reduction, but it is not based on current market value of the property. Banks that reduce principal may give up to 20 percent reduction in principal depending on how much the property is underwater. Some banks forgive any missed payments of principal and interest incurred before the date of loan modification. Some banks added the missed payments but not the late fees to the balance of the principal. Banks usually give borrowers some time before the start of the first payment on the loan as modified.
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