Category: Loan Modifications

Loan Modification — How Lenders Require You To Requalify for Financing

Loan Modification: Changing the rules (in the middle of the game)

When you were a kid, did you and your friends ever invent a new game? You may have stood around for a few minutes and ironed out the rough details about how the game would be played. You probably didn’t think it through – you worked out a simple framework and gave it a shot. About halfway through, someone would invariably make the painful discovery that the game was seriously flawed and in drastic need of repair. Rather than scrap the entire game, you and your friends would huddle together for a few minutes and simply change the rules, so that it would be possible to select a winner. I sometimes wish I could do the same today…

If you’re facing bankruptcy due to a situation beyond your control, such as a job loss or a reduction in income, you may find that you need to change the terms of your mortgage loan. Because of the change in your financial situation, your loan is broken, and there’s seemingly no way you can “win” without changing the rules – or terms – of the loan.

The current mortgage crisis has seen millions of homeowners face the same crisis you’re facing, so lenders are a little more likely to consider a variety of bankruptcy alternatives including loan modifications. If you’re able to convince your lender to modify your loan terms, you may be able to stay in your home and get back into the good graces of your mortgage lender.

Unfortunately, loan modifications are difficult to obtain because the average mortgage loan has been sold multiple times since you originally signed on the dotted line. While it is still technically possible that your lender will consider your bid to modify your loan terms, it’s not likely.

For example, according to the Hope Now Alliance – a coalition of the nation’s 25 largest loan originators – only 278,000 loan modifications have been approved in the first six months since they began working together to reduce the number of foreclosures facing the mortgage industry.

In order to qualify for a loan modification, your lender has to first be willing to consider this as an option. Assuming that they do, you will more than likely be required to re-qualify for financing. This process is likely to include a credit check, income verification – and a new home appraisal. Since property values have been dropping like a rock, it’s possible that your home is now worth less than you currently owe.

A loan modification may or may not be the best solution to your current problem. This is one of many possible solutions to your financial dilemma, and waiting until you’re facing bankruptcy to begin researching solutions is not a good idea. Unfortunately, time is not your friend because the foreclosure clock is very loudly ticking away the remaining weeks until you’ll lose your home.

Instead of relying on your instinctive nature to pull the dirt over your face and pretend you don’t have a problem, you should pick up the phone and call a trained real estate professional. Because they are a neutral third party, a real estate professional can take an honest look at your entire financial situation and make recommendations that are in your best interest.

This advice is free, solid, and could mean the difference between preserving your hard earned equity and losing it to a strategy you might be better off avoiding. Unlike a childhood game that has no lasting consequences, your home and thousands of dollars are on the line. Instead of running the risk of making a rash or imprudent decision, pick up the phone and seek the help of a trained real estate professional.

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categories Loan Modifications | | datetime April 15, 2010 5:26 am | comments Comments (10)

Why Are Loan Modifications Difficult?

There is a radio ad that promises homeowners facing foreclosure a guaranteed, on-the-spot, while-you-wait loan modification for only $995. The Federal Government has announced programs to help homeowners obtain loan modifications. Articles abound on how easy it is for homeowners to just pick up the phone and call their lender to negotiate a loan modification. Is it that easy to get one? The answer: definitely not.

In order to get current on a loan, if bankruptcy and refinancing are out of the question, a lender will typically allow a homeowner to catch up by first offering a forbearance agreement. This means that the lender will let a borrower repay at higher than usual amounts ($1,000 or more) for the next 4 to 12 amounts and then require the final balance at the end of that period. Sometimes, the lump sum payment is at the start in order for the borrower to show good faith. After 4 months you will then be granted a loan modification if you have been making your payments on time. A loan modification cannot be granted to someone who can’t make a regular payment.

A second option is to give the borrower an immediate loan modification which will involve reducing the interest rate by 2 to 5%. The program will last from 6 months to 5 years but at the end of that period, you are back to the original terms of the loan.

An interesting variation is the one where the borrower is given a trial period of 4 months where the interest rate is reduced and, if all the payments have been made on time, a loan modification is then granted..
One can clearly see that none of the 3 scenarios above actually offer the homeowner long-lasting relief. The first one is a joke since the borrower missed payments because of some type of loss of income and for him to pay back at even higher amounts simply burdens him even more. Some amount of assistance is offered by the second and third kinds but, if the borrower’s financial situation does not improve at the end of the period, then he still stands to lose his home.

The question then is: Why aren’t lenders helping borrowers? What follows is an attempt to provide a simple overview of the entire process.

Loans are bundled together by the lender and placed into trusts for sale to investors. These tranches are sold to securities dealers who then sell them to investors. A trustee oversees the payments. The securitization process is governed by a Servicing Agreement . This agreement authorizes the servicer (the bank that executed the loan) to perform a loan modification if the loan is likely to default. But, if the borrower is up to date on payments, the servicer’s hands are tied. Hence, if the homeowner has been paying his mortgage on time and then loses his job, he will not be granted a loan modification unless he has actually missed on his payments.

Servicers have a duty to maximize the return to the investor and to minimize their loss. They are nothing more than collection agencies. They are obliged to foreclose on properties because for each payment missed by the homeowner, they have to advance funds to the investor from their own money. When the property is sold they recover their money.

When a borrower requests a loan modification the servicer must calculate what is of greater benefit to the investor. This is referred to as the Net Present Value Test. Should they make no modification and eventually foreclose on the property after which they deduct costs and losses and determine the present dollars left to the investor or modify the loan, wait to get back advances as the borrower makes larger payments to make up for the missed payments? Quite obviously, foreclosure is the better option for the servicer.

A loan modification is complicated in the sense that if the homeowner pays too much he may go into default again and if he pays too little the investor will be displeased with the loss. A Debt Ratio analysis now comes into play but, this time, the income has to be fully documented. This is how it goes. The servicer let the borrower get away with stated income when he applied for the loan (most likely a 45 to 50% Debt Ratio) but they will certainly now do the correct thing and consider only verifiable income. The 31% Debt Ratio will be used and, of course, given that the borrower has reduced income, the loan modification will never be granted.

Meanwhile, there are other factors that the servicer will consider such as the condition of the property, length of time it takes to sell, current value of the property, cost of foreclosing and many more. The decision to foreclose is almost inevitable unless the homeowner chooses some other way to avoid this. Short sales are now very appealing to lenders and having a short sale specialist on your side will tip the scales in your favor.

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categories Loan Modifications | | datetime April 4, 2010 5:08 pm | comments Comments (11)