Loan Modifications & the Media

By Joel Persinger
YourRealEstateDude

Earlier this month U.S. Comptroller of the Currency, John C. Dugan, while speaking at a panel discussion with other government big wigs, shared some data from a new government report. Referring to loan modifications, he said, “After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent." Knowing a good sound bite when they hear one, the media did what the media does best. It beat the drums until people all over began looking at loan modifications as if they were just the latest creative way for crooked real estate agents and lender to rip people off.

National TV news programs have aired investigative stories, newspapers have published damning articles and radio talk show hosts, including a very popular fellow here in San Diego, have launched into tirades bemoaning the evils of loan modifications and why they don’t work. Are all these media “know it alls” right? I hate to burst their inflated egos, but the answer is, “NO.”

Loan modifications are exactly what their name implies. They modify the terms of a borrower’s loan. That is the limit of what they do. They do not modify that borrower’s spending habits or alter that borrower’s understanding of how money works. Those changes in behavior are left to the borrower to undertake on his or her own. Borrowers who make changes to their lifestyle and adjust their spending do just fine once their loan terms have been modified. Others, and apparently the number is upwards of 58%, continue to live as they did when they got themselves in trouble in the first place. So, within a few months they find themselves in trouble again. What amazes me is that anyone is actually surprised by this fact.

Have you every met anyone who got themselves into deep credit card debt and decided to refinance their home to pay off the credit cards? Did you know that most of those folks charge the credit cards back up within months of being bailed out? Refinancing to pay off the cards only addresses the symptoms and leaves the disease of poor financial habits to rage on. Loan modifications are no different. Therefore, if you have your loan terms modified, you must understand that some lifestyle changes may be required in order for you to make the payments. If you simply continue spending as you always have, you will likely be in trouble again in just a few months. It’s that simple.

If you think I’m wrong, just go to a financial seminar sometime. You will quickly learn that the overwhelming majority of Americans wouldn’t know a family budget if it hit them in the face. We may teach reading, writing and arithmetic in school, but we don’t teach how money works or how to be successful using it. Those lessons are taught by parents, most of whom have no idea what they’re doing either. So, here’s the bottom line on loan modifications: If you want to keep your house rather than sell it or lose it to foreclosure, a loan modification may be just the ticket for you. However, you MUST address the spending habits that got you into trouble in the first place by putting in place a family budget and sticking to it.