The Debt Management Expert

Overview
If you are a homeowner interested in and qualify for a loan modification, it is important to keep in mind that the lender is forgiving a portion of your debt. There are several types of loan modifications that a lender can offer you: interest rate, length of amortization, principal balance reduction for a first mortgage as well as for a second mortgage. Principal balance reduction is the most coveted approach of all loan modifications. Make sure to avoid quick fix loan modifications that may be offered to you such as a simple forbearance, short sale, deed in lieu, or temporary interest rate reduction. These types of loan modifications may seem appealing at first, but they will generally hurt you in the medium- to long-term.

While your home can be repossessed through foreclosure if payments are not made, the lender or the loan modification company cannot make any changes unless all individuals on the mortgage agree. Your notarized permission must be received to implement any changes.

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Interest Rate
The simplest feature in a loan modification that can be adjusted by a lender is the interest rate. If the interest rate is lowered, so is the mortgage payment.

If you are a homeowner who originated a sub-prime short term adjustable rate mortgage several years ago at 5% and then saw it adjust to 9%, for example, you probably are having quite a bit of difficulty making the additional monthly payment. Now that loan modifications are more available from lenders, you have another option.

All lenders are willing to aggressively lower interest rates for loan modifications to qualified applicants when they are not requesting a reduction of the balance reduction of the mortgage or an increase in the length of amortization. A lower interest rate on the mortgage is the simplest, safest and most cost effective loan modification for lenders.

Length of Amortization
Length of amortization refers to how many years a borrower will be paying back the mortgage. The most typical timeframe is 30 years. The amortization does not reflect the length of time that the interest rate is fixed, just the total years that the mortgage will be repaid. For example, if you have a five-year adjustable rate mortgage amortized over 30 years, the interest rate will adjust after five years and can adjust up or down for the remaining 25 or until refinanced. In order to make payments more affordable, a lender may offer you the option to stretch out the loan modification payments over 40 or 50 years. This will lower your monthly payments considerably since you would now have an extra 10 or 20 years to pay off the loan modification. Any recalculation of the amortization is always done using round numbers. The options for loan modification are 30, 40 and occasionally 50 years.

Stretching out the amortization in a loan modification does not help the higher interest rates nearly as much as it helps the lower rates. During the mortgage boom, sub-prime lenders were much more inclined to offer longer amortization for loan modifications since they were qualifying the borrower with around the same payment as the 30-year loan but they were collecting 10 more years worth of interest.

Stretching out the amortization for a loan modification has additional benefits. Borrowers who paid interest only payments for the first few years were not paying down any principal. That means that your loan lost a year of amortization each year. Therefore, if you were to have kept your loan, it would have converted after the interest only period into a fully amortized fixed loan of usually 20 or 25 years. Those payments are enormous compared to the new 40- or 50-year term. Lengthening the years of repayment in a loan modification might be helpful but usually not enough to turn around a troubled homeowner’s financial situation.

Principal Balance Reduction
The principal balance reduction is the most coveted of all loan modifications. The lender is forgiving a portion of your debt. Simply speaking, you just do not owe that money any more. Banks and lenders are very reticent to do this because this is a loss that is not recoverable and therefore not given away easily.

When banks or lenders do grant a principal balance reduction, it is because the value of the property is so much less than the balance owed that there is no reason for the homeowner to remain. If you owe $500,000 on a $400,000 property, would you want to pay those huge mortgage payments only to realize that you are still upside down? Even if you were to wait it out until the market recovers, you would not know how long it would be until the property value appreciates to $500,000 again. It would be wiser to walk away from the home, take the credit hit, and rent a very similar house down the street for half the monthly payment.

Principal balance reductions help in more ways than just reducing your debt. It also reduces your payments and the amount of interest you pay over the life of the loan.

Principal Balance Reduction involving a 1st and 2nd Mortgage
Principal balance reductions are much easier to get when you have a first and a second mortgage because in the instance of a foreclosure, the lender of the second mortgage is likely to get nothing. The proceeds from a foreclosure will result in the first mortgage getting paid off first. Then whatever is left over goes to the holder of the second trust. Holders of second mortgages are absorbing massive losses while recuperating nothing. Since lenders realize this, they are much more likely to grant a reduction. The banks or lenders would rather get 10 to 20 cents on the dollar rather than nothing. If you cannot make your payments, you are going to lose your house. Lenders are going to do what it takes to prevent that. If the same lender owns your first and second mortgages, you are in the overall best position for a principal balance reduction.

Overview
Loan modification is not a new practice, however it is more common now due to the mortgage crisis, declining home values and the economic recession. When property values are remaining consistent or are rising, your ability to get a loan modification tends to be very difficult. When a home facing foreclosure has equity, the bank takes a minimal loss or no loss at all. With nothing to gain the bank has no interest in approving a homeowner for loan modification with a track record of financial difficulties. The lender can place the property in foreclosure, find a new homeowner who can make the payments on time and remain profitable. Banks do not want to engage in loan modifications or deal with a risky borrower in a stable economy.

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Declining property values combined with tougher lender guidelines and adjusting interest rates have resulted in the loan modification boom. No one is going to buy a home for 15%-30% above market value and no lender is going to refinance that property. Your mortgage, or mortgage-backed security, is the collateral for the note that a bank lends a borrower.

In the current economy, equity in homes has dwindled and, in many cases, has become negative. In lieu of foreclosure, banks would rather reduce the borrower’s mortgage payments and/or balance. Neither banks nor borrowers have power in these difficult times. In fact, banks and borrowers must work together to avoid foreclosure to not only keep families in their homes but also turn this recession around. Loan modification might mean immediate financial losses for our banking institutions, but the long-term mortgage payment losses are minimized versus mass foreclosures.

Millions of Americans have taken out high home equity loans against their mortgages in markets that were at the time appreciating but now have rapidly depreciated. Then, when the homeowner’s adjustable-rate mortgage (ARM) changes and the payment can no longer be made a bank will try to refinance the mortgage, only to discover there is little chance. Most homeowners believe their only option is foreclosure. Since they cannot make the payments, sell, or refinance, are there other options other than foreclosure? The first options that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.

With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to revisit their loan modification strategy. In today’s economy, banks are willing to engage in loan modification to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.

Overview
Loan modification is a process whereby a homeowner’s mortgage is adjusted and both lender and borrower are bound by the new terms. The mortgage terms are adjusted because the borrower is unable to make payments under the original agreement or because the value of the property is worth less than the borrower owes on the mortgage.

When homeowners fall behind on their payments, they are faced with a few very tough choices: foreclose, deed in lieu of title, short sale or loan modification. Loan modification is the only one of these options that does not force the borrower to vacate their home. Loan modifications are designed with three basic objectives in mind:

• Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.

• Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.

• Ensure investor interests are protected; loan modification must always result in a positive net present value outcome for the investor; the cost of the loan modification must be less than the estimated cost of foreclosure.

Banks will allow certain changes to be modified for borrowers who can document the ability to repay the loan in a reasonable and sustained manner. The most common loan modifications are:

• temporarily or permanently lowering the interest rate,
• reducing the principal balance
• ‘fixing’ adjustable interest rates
• adding an interest only option
• increasing the loan term (i.e., from 30 to 40 years)
• a forbearance agreement
• forgiveness of payment defaults and fees

… or any combination of these changes.

Loan modifications are designed with payment levels so that the borrower can consistently make his mortgage payment as well as pay his other bills. Mortgage payments within an arranged loan modification are not intended to consume an entire monthly budget. Lenders will generally take the homeowner’s entire budget into consideration i.e. car payment, cell phone, utilities, credit card payments, and other necessary expenses needed to live a normal life while still maintaining a reasonable mortgage payment. With loan modifications, the benchmark ratio for calculating a borrower’s affordable payment is 38 percent of monthly gross household income.

A loan modification is a negotiation between your modification company and the primary lender (a bank or other financial institution). Your modification company will present the lender with a proposal backed up by your documented income and monthly expenses, which includes both hard and soft expenses. Soft expenses are difficult to document. Your modified monthly mortgage payment is determined by the difference between your total income and your expenses.
Great! I know what a Loan Modification is now. Do I Qualify?

Until you go through the process it is difficult to say if you qualify. Ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home