Here is just another example of the loan modification nightmare. Now, homeowners will be required to go through a trial period before the borrower will be allowed to permanently modify their loans. In other words, the banks want to make sure that the homeowner can still make their payments on time, otherwise what’s the use in modifying the loan in the first place?

The key point for loan modifications is to help borrowers who have fallen behind, late on their payments or just can’t afford their payments. There are plenty of scenarios in which this creates a hardship. For example, when the borrower purchased the home, it may have been “overvalued.” The property may have been valued at $400,000 when initially purchased. But, today it’s only worth $200,000. The real problem here is that the loan amount may be for $300,000. Thus, the homeowner is making a mortgage payment on a $300,000 loan, when the house is only worth $200,000. This is called an “upside down” situation.

Another example of unaffordabilty requiring a loan modification is loss of job. In this scenario, which is all too common right now, the borrower or borrower(s) have lost their jobs and can’t make their payments. The “catch-22″ here is that borrowers need to be able to show ability to re-pay. Well, how in the heck can someone show ability to “re-pay”, when they’ve lost their jobs? Couple that with having their credit ruined and you can quickly see that this is an untenable situation.

This new loan modification requirement for a trial period is just another barrier that administrators have put up to make it harder for borrowers to modify their loans permanently. Some may argue that it’s a good thing. However, I think it’s just another way for the banks and the administration to shirk their responsibilities to help the homeowners.

Let’s dissect this trial period. The trial period means that the lender gives you typically a three month period to test whether our new payment will succeed. In other words, if they’ve modified your loan to a lower payment and in three months you’re still unable to pay, the lender can reverse the loan modification.

Some people want to know whether the trial period is a requirement. If your loan is a Fannie Mac loan, then, yes, it is required if you’re part of the government’s program. The trail period could be as long as four months if you are current with your loan.

What about a foreclosure? Can the bank continue with a foreclosure? If you are in a trial period the lender is required to stop the foreclosure while the loan modification trial period is in effect. But, if you’re unable to complete the trial period, the lender can start up a foreclosure at any point.