During the third quarter of 2008, nearly 5,000 Indiana homeowners — about four times as many as during the same period last year — were able to avoid foreclosure by completing a mortgage loan modification, reports the Homeowners Preservation Foundation, which tracks the impact of foreclosures nationwide (“Record Number of Mortgage Modifications,” Chicago Tribune, Jan. 11, 2009).

Last year alone, 100,000 homes in Indiana went into foreclosure, contributing to a significant decrease in home values across the state. But by allowing mortgage lenders to adjust key terms of a home loan, including the interest rate, the length of the loan, or even the principal balance, loan modifications have helped thousands of Indiana families to avoid foreclosure, while also helping lenders avoid excessive losses.

Typically, lenders lose about 55 percent of the balance of the mortgage when a home goes into foreclosure, says Alan White, an assistant professor at the Valparaiso University School of Law, due to court fees and the legal costs of foreclosure proceedings, resale and fix-up costs, and the loss of revenue from both missed and unrealized mortgage payments.

But in the current recession and ongoing housing crisis, with home sales sluggish and home values continuing to be driven down by an epidemic of foreclosures, the losses incurred by lenders in a foreclosure are on the rise. Lenders can no longer recoup as much of their foreclosure losses in a resale of the home, being forced to sell these houses at greatly depreciated prices — if they can find a buyer at all.

The average loss for mortgage lenders in a foreclosure is significantly higher in today’s housing market than it was three or four years ago, says Jon Meade, vice president of loss mitigation for Cincinnati-based Fifth Third Bank, and it’s this threat of a deep financial hit that has led some lenders in recent months to become more amenable to modifying a homeowner’s mortgage as opposed to having to write it off as a loss in foreclosure.

“We are wiling to give (interest) rate concessions to get the customer to a surplus situation,” Mead said. “What makes sense is keeping a loan performing.”

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