In general, I think modifications of a mortgage are a bad idea unless they are coupled with principal reductions. For most people, a modification will only be a means of “kicking the can down the road.” A modification today could be a disaster in a few years.
The average American moves every seven years. Consider the homeowners whose family size changes, necessitating a change in their home size—either an increase or a decrease. Years from now, without a principal reduction, they will need to short sell their property, will have outstanding debt and may not get the benefit of the Mortgage Debt Forgiveness Act to prevent tax liability.
For example, if a couple got a modification today and had children in two years, they might have to sell their property to buy a larger home. The modification solved the problem today, but their property may be worth less than the loan against it (“underwater”) when they sell. This could hurt their credit, and they may be liable for taxes on remaining debt forgiven by the lender. The Mortgage Debt Forgiveness Act exempts forgiven debt on a personal residence from taxation but currently only extends to the end of this year.Continue reading →