Lets step back for a moment before we suggest a blanket condemnation of loan modifications. For those burdened with a soon to adjust ARM, who have been chugging along just fine with their current payment, and who clearly will go into a financial tailspin when their rate adjusts upwards, are clearly the best candidate for a loan modification. This is assuming their loan can in fact be modified pursuant to the terms of the PAS.
Chances are if this group of borrowers are afforded an opportunity for a modification, then that modification will have a very broad release. Is this an example of a servicer and/or investor being optimistic? Yes. However, if a borrower can afford to remain in their home with a modification, at the cost of giving up their rights to sue, may be the best option. This is especially true if they have equity.
The likelihood of being granted a loan modification is based on several factors: (1) If the borrower plans ahead and formally (in writing) applies for a modification long before they reach the possibility of default. (2) The Pooling and Servicing Agreement (PSA) that contains their loan does not forbid loan modifications, (3) the modification is limited to a rate freeze or reduction to the previous rate. And (4) the borrower can clearly demonstrate they have the financial ability to successfully meet the modified terms.
This not to say that a borrower should not try for a post-default modification, they should. And remember that giving up your right to sue in return for a modification that allows you and your family to remain in your home may not be a bad trade-off.