Loan Modification

[wizard]

I was on a conference call last nite about foreclosure workouts. For example

homeowner owes 100k on the loan, payments are 1500 a month. But are 4 months behind 6000. The lender will then take the 6k and put at the end of there loan totalling 106k. Does anyone knows about doing this or ever did it? This will let the homewoner stay in there home. Please explain

[Just Information]

A loan modification workout program seeks to avoid foreclosure by negotiating with the lender to modify the terms of the loan.

This workout makes sense in a situation where a homeowner has experienced a decline in income and can no longer afford the original loan but could afford the payments with a little adjustment. Example loan modifications include lowering the interest rate, extending the loan period, or adding the delinquent portion and fees back onto the principal of the loan to be repaid overtime.

A repayment plan is suited to a homeowner who has had a short-term financial hardship but is now getting back on their feet. Although a homeowner is recovering, they may be several months (and thus several thousand dollars) behind on their mortgage payments and they need time to bring this amount current.

Once foreclosure has been initiated, however, a lender often will not accept any further payments less than the entire delinquent amount (this is so that they do not jeopardize their rights under the current foreclosure proceedings). A repayment plan requests that the lender stop the foreclosure process and structure a repayment schedule in a more lenient fashion to allow the recovering homeowner time to catch up their loan and save their home.

A forbearance is a request that the lender forbear (stop) from proceeding any further with the foreclosure for a short period of time. This is usually done along with another workout. For example, a lender would issue a forbearance while the homeowner tried to sell their home to cure the debt (see "short sale" below).

A "short sale" is the best solution when the homeowner is "upside down" in their home due to a decline in the local real-estate market (meaning they owe more on their home than it is worth).

By doing a short sale, the homeowner is asking the lender to discount their mortgage principal to a level that can be discharged by selling the home at market value.

Short sales can be done with multiple mortgages / lien holders, but the negotiations involved become more complicated.

Under a "deed in lieu" workout a homeowner surrenders their property to the lender in exchange for forgiveness of their mortgage. These workouts are more rare than the others mentioned here because it still leaves the lender holding a repossessed property that needs to be resold. Therefore, lenders are much more open to a short sale scenario as a more complete solution.

You or your customer should contact the lender to find out what kind of workout programs they have available.

The first thing to realize when you deal with a lender is that their frontline contact point for delinquent borrowers is probably a collections group whose goal it is to persuade the property owner to bring the mortgage current.

Another department, typically referred to as the "loss mitigation group", works with property owners who cannot get there loans current without some form of a workout program.

Once you are more informed as an investor about options to stop or delay a foreclosure and you will be able to help even more people.

Note Modification - Most workouts are usually secondary agreements that temporarily suspend the foreclosure terms of the original, primary loan agreement.

However, a note modification, also called a recast or re-amortized loan permanently modifies the terms of the original, promissory note. Items commonly modified are:

a. Interest rates.

b. Principle amounts.

c. Transfers of liability to another borrower upon resale.

Some lender/servicers may have little or no practical experience with note modifications, while others may have departments already set up to do them. If a note modification is granted, be prepared to pay a loan fee based on a percentage of the loan balance and/or the current loan fee rates.

A. Interest Rate Modifications: A change to the interest rate on your customers note can happen if the

current market interest rates are lower than the rates your customers are paying.

The rule of thumb with interest rates is, if the current market rates are lower by 2 percent or more than the rate on your present mortgage, and if a reduced interest rate would decrease your customers exposure to foreclosure, then pursuing a note modification may be worth your effort.

Simply, the note modification exchanges the older, higher mortgage rate for the newer, lower rate without the many costs or paper work hassles of reapplying for a brand new loan.

The note modification actually becomes a viable alternative to refinancing.

B. Principal Amount Modifications: You can also increase the principal amount of the note,

after a period of delinquent, reduced or suspended payments, to include the total amount of all the missed payments.

For example, if your customer is behind six payments of $1,000 on a note of $100,000, then they owe $6,000 in delinquent payments. If, in a note modification, you add the delinquent $6,000 to the principle amount of $100,000, then you will have a modified amount of $106,000.

The benefits of this type of modification are: first, it provides a method by which the lender is repaid the delinquent amounts, and second, the borrower can start over without the pressure of back payments and foreclosure.

The monthly payment for the modified note will be slightly higher than the old payment, but not nearly as high as it would be if the arrears were being paid back on a six to twelve month payment plan or a forbearance agreement.

A principle amount not modification is one of the most desirable workouts available.