Struggling Homeowners Likely Candidates for Debt Consolidation? |

Homeowners relying on mortgage loan modifications to avoid debt consolidation may be out of luck. At least that’s the news from a recent New York Times story that says that completed mortgage loan modifications through the federal government’s Home Affordable Modification Program have hit a standstill. Last year, the federal government introduced the mortgage modification program as a way to provide relief to consumers struggling to pay their monthly mortgage payments. Lenders and banks, which were provided with financial incentives from the government, are being asked to work with these homeowners to somehow reduce their monthly payments. They can do this by lowering the interest rates on loans, extending loan terms or forgiving part of homeowners’ principal loan balance. Problem is, the number of successfully completed loan modifications has slowed to a trickle.

Dismal Statistics

The government reports that the program has helped 300,000 homeowners modify their mortgage loans to more affordable levels. Unfortunately, as the New York Times story reports, that’s only a small percentage of the estimated 4 million U.S. households in danger of foreclosure. This relatively low number of mortgage modifications may also lead a growing number of homeowners toward a future of debt consolidation loans.

Few Options

Mortgage payments are usually the largest monthly debts that homeowners face. If homeowners can reduce this monthly expense, they’ll ease their debt burden significantly. However, if they can’t – because mortgage companies aren’t responding quickly enough to loan modification requests – they have little choice but to take other measures. This includes debt consolidation loans, in which debt consolidation companies combine their clients’ monthly debts into one single payment. Debt consolidation will help consumers get their financial lives back on track, but it does come with some drawbacks. It will lower consumers’ credit scores, and debt consolidation companies often charge high interest rates.

Housing Crisis Fallout

The government started its Home Affordable Modification Program as a way to deal with the fallout of the housing crisis, in which homeowners saw their home values plummet seemingly overnight. As unemployment rose, more homeowners were unable to afford their mortgage payments. And with housing values down, many homeowners have been unable to refinance their existing loans to take advantage of lower interest rates. It’s a perfect storm. A recent survey from First American CoreLogic stated that nearly 25 percent of all U.S. homeowners are currently underwater on their mortgages, meaning that they owe more on their loans than what their homes are worth. This statistic goes a long way toward explaining why more homeowners may soon take a long look at debt consolidation loans.