Some of us already knew it was possible to get a bank to do a loan modification prior to delinquency, now Fannie Mae joins the party.  Kenneth Harney’s column in the Sunday San Francisco Chronicle announced that Fannie Mae will allow borrowers to request alterations to their mortgage even if they have never been late.

Essentially a loan modification is when a bank agrees to changes the terms of your mortgage due to financial hardship.   Most banks won’t reduce the principal owed, often leaving the property underwater, but they will lower the rate (I recently heard of a mortgage that was modified to an interest rate of 1% for 5 years) and they will extend the term (ie. from 30 years to 40).

The loan modification industry is a wide open field and lots of confusion abounds.  The feds have been slow to put any regulation in place, so as usual the market is making it’s own rules.  Unfortunately,  some people are getting scammed by brokers that say they will negotiate the loan, and then disappear with the fee.  But loan modifications can work and for some people banks have been quietly modifying loans even before the mortgage ends up in the loss mitigation department.  Some banks are even proactively looking for signs of distress and contacting the borrower early.

Harney’s article is a good read and documents that a trend that was already underway comes into the mainstream with the Fannie Mae announcement.