Loan modification is certainly possible, however loan modification due to dropping Real Estate values is unlikely. To understand a modification, you need to take a look at what terms you agreed upon at the time of purchase. A mortgage and a note were signed when you took out the loan. The mortgage would state that you were pledging a certain piece of Real Estate as collateral against the funds that were lent to you to purchase the home. The note outlines that terms at which you have agreed to pay back the loan. These will include the date your repayment begins, the interest rate, the amount of the payments, and how many payments you will have.

A loan modification is modifying the note that you signed at the time of close. There are several reasons this may happen, and several avenues this may take. It is first necessary to understand that the note you signed is a legally binding agreement between you and the lender. Anything in this note can be modified, as long as it is agreed upon by both you and the lender, as you are changing the agreement that you made. Forms of modification may include the following:

1.) Reducing the interest rate on the loan, which will allow for a lower monthly payment.

2.) Fixing an interest rate on an Adjustable Rate Mortgage (ARM).

3.) Reamortizing the note to extend the term of the loan and help lower payments.

4.) Lowering the principal balance on the loan.

Once you understand what can be done, you need to understand why it would be done. A lender will typically only agree to modify a loan if there is current proof that you are having difficulty handling the payment, or have had a situation that has adversly affected your ability to repay the loan (lost job, loss of income, etc). A lender will not typically lower a balance of a loan simply because. Real Estate is an investment like anything else, and is not guaranteed to increase in value. Simply because home values have dropped doesn't mean that you should owe less on the home. By the same token, should property values rise in the future, is the bank entitled to more money because the value appreciated? Loan modifications, while they exist, are typically done to help a homeowner retain a home when they are in danger of losing it. They are not designed to insure a borrower against an unrealized loss on investment due to property values dropping.