Avoiding Foreclosure with a Loan Modification 

The ultimate goal of a loan modification is to prevent foreclosure proceedings, which are bad for all parties involved. For obvious reasons, a loan modification is beneficial for a home owner because they can keep their home. A modified loan protects the credit score of a borrower, so they remain loan-worthy for auto loans, student loans, etc.

But, why would lenders agree to take a loss by making changes to a mortgage agreement? Lenders are in the business of processing loans, and collecting monthly payments. So, they are focused on using money to make more money. To that end, lenders can not make money when they foreclose on a home. Even if a bank has collected payments for years, and a foreclosure leads to them owning the home outright, they would rather avoid it. Banks plan around the receipt of monthly mortgage payments, therefore a loan modification is attractive to them. 

Another benefit of a loan modification to lenders is that all or portion of the outstanding payments are usually rolled into the loan modification and therefore will not be lost revenuer. The lower payments help the borrower to repay, and to the lender the added time increases the overall earned interest. And the final, and largest, reason is that in the current housing market almost every foreclosed home is sold at a loss to the bank.