The loan-mod time bomb

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Tick. Tick. Tick. Tick. Tick. That's the sound of the federal government's Making Home Affordable loan modification program, which is set to explode sometime after 2014. In case you haven't heard, the program is the federal government's latest attempt to reduce the high rate of foreclosures. The program creates a process for loan servicers to modify the mortgages of homeowners who spend more than 31 percent of their income on housing costs and have missed a payment or are in imminent danger of default due to financial adversity. The mortgage payment typically is reduced through an interest rate as low as 2 percent, a term as long as 40 years, and deferral of a portion of the loan balance. The program has some positive features, but homeowners should be concerned about the longer-term implications. The program allows the loan servicer to add unpaid interest, property taxes, homeowners insurance premiums and other costs onto the loan balance and then defer part of that balanc...