Loan Modification: Effects of Government Regulation

Loan modification is a process that permits borrowers to reset the terms of their loan and presumably lower their costs. This process is reluctantly offered by some lenders as a result of government mandates.  This thought has provided at-risk borrowers to come to the table and seek terms that are more affordable and allow the borrower to hold on to their homes and other property.

Generally, a loan transaction between a private lender and borrower is considered a force of the free market economy. If a borrower fails to live up to their commitment to pay back the loan as promised, the lender is given recourse in the loan agreement to repossess the property financed with the loan and request foreclosure proceedings. Because this is understood by both parties entering into the arrangement, government regulations only deal with the fair dealing of both sides to ensure that the rights of one party are not trampled upon by the other party.

The Reason for Government Regulation

Where these loans, specifically home mortgage loans, have created a large economic disaster in certain communities as the rate of foreclosure increases, the government has stepped in and offered a guarantee for lenders to provide a way for homeowners to modify the terms of the previous loan. This guarantee extends to loans conforming to Fannie Mae and Freddie Mac 15 and 30-year mortgages and provides a way for the lender to avoid the process of entering into a foreclosure proceeding that result in the receivership of property that is difficult to resale.

Benefits of Government Regulation

The effects of government regulation of loan modifications benefit greatly the borrower since it helps stave off foreclosure and save the home of a family. It also provides some assistance for a lender in the form of guarantees that helps the lender refinance the loan and modify its terms. Ultimately, government regulation provides a way for borrowers and lenders to come to the table equally and mutually agree on a plan to redo the loan and maintain a paying borrower while saving a home and preventing the devastating economic effects of foreclosure within a community.

Case against Government Regulation

There are those that argue that government regulation in a free market system causes the markets to behave unnaturally. Individuals, both borrowers and lenders, who acted irresponsibly should not have access to government protection in the form of regulation in order to be relieved of their obligations. Although these arguments may have some merit, the large concern that causes government regulation to be necessary involves the devastating effect of foreclosures on communities at large.