The Debt Management Expert

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
For qualified homeowners that need to renegotiate the terms of their mortgage with their lender, a loan modification is a good option when properties values are dramatically declining. Loan modifications are the best recourse for homeowners looking to renegotiate the terms of their loans, because the homeowner is unable to make payments under the original agreement or because the value of the property is worth less than the homeowner owes on the mortgage. Loan modifications also serve the needs of lenders that would prefer to avoid foreclosure and a sale of the asset at a significantly reduced price.

Refinancing is advisable in a stable or increasing market. It gives homeowners the ability to take cash out when needed, lower their interest rate, and fix their interest rate, among other options. In today’s declining market, refinancing is available to a much smaller group of homeowners — only those who are current with their mortgage payments, have a strong credit history and job security, disposable income after all bills are paid, and significant equity in their property are eligible.

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Whether you will be able to refinance or qualify for a loan modification depends on your individual situation. Most homeowners interested in making a move in this market are the ones who are in trouble and therefore do not qualify for a refinance. If you are behind on your mortgage, always attempt a loan modification first. When a homeowner is late but can show the ability to pay a lower payment, the benefits from a loan modification will greatly outweigh that of a refinance. The interest rate on such a loan modification will generally be lower than that of an on-time homeowner with good credit who pays to refinance.

Getting approved for a traditional refinance is extremely difficult. Since Wall Street is no longer purchasing loans from originating banks, lenders have cut programs to less qualified homeowners. When considering refinancing in a market where equity has evaporated, causing balances to exceed value, there is no option to refinance. This is true for all homeowners, sub-prime as well as qualified homeowners.

If you are a homeowner that is upside down, you would have no option to refinance and your best bet would be to seek out a loan modification. If you are not late but are upside down, loan modification companies such as ours can make it a seamless and transparent effort that could potentially knock tens of thousands of dollars off of your principal balance. Who could argue with that?

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

some essential tips that might help you save your home.

#1 Homeowner Tip = Have an experienced mortgage attorney examine your loan documents for these potential violations.

#2 Homeowner Tip The homeowner needs a complete written life of loan history to see all the bogus charges and fees included in their mortgage balance. Also, the homeowner should make sure that any inflated appraisal and/or loss of property value is calculated into the workout.

Red Flags and Things to Look Out For in Your Loan:

Start by comparing the loan you got with the one you thought you were getting. Are the terms the same? That is, is your Annual Percentage Rate (“APR”) the same as the one you were quoted? Are your total monthly payments the same as you were told they would be? Is there a prepayment penalty, and if so, were you told about this prepayment penalty?

If you have refinanced your primary residence, that is, the home your currently live in, then the first thing you should look at is the “notice of Right to Cancel” which is also called the Three Day Right of Rescission. You usually has three days after signing loan documents to change your mind and cancel the loan.

The borrower must be told of this right in writing.

If the creditor fails to properly provide notice of this right to cancel, the right of rescission may be extended for up to three years.

When the right is extended for three years you can rescind the loan at any time before three years, meaning that the loan is treated as if it never existed. Essentially, you become entitled to all profits made by the creditor as a result of this loan. This means that the creditor must refund all interest paid, all closing fees, all broker fees, and even pay for your attorney fees. As you can imagine, this amount can be quite significant.

The extended right of rescission is a powerful tool to help borrowers who have been victims of predatory lending, and helping our clients exercise this right is often the first step in holding a creditor responsible for illegal behavior.

If it is determined that no laws have been violated on your mortgage, then it’s time to approach your lender for a possible loan workout or loan modification.

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The factors they will look at are:

1. Nature of Hardship Causing Your Mortgage Problems

2. Ability to pay

3. Amount Owed

4. Equity in the property

5. Future financial situation

6. What is better for them. To foreclose or pursue a loan workout with you and or modify your loan. Meaning which approach will best benefit the lender in the long run.

A loan workout or loan modification generally occurs where the parties to a problem loan mutually agree to workout the problem by creating new and better loan terms. The hope is that the new loan will enable to the borrower to meet their obligations.

When applying for a loan modification, make a game plan on how exactly you are going to approach them. These people are trained in minimizing loss for their company and they get paid to by getting the most amount of money out of you as possible or declare that your case is un workable and foreclose on you. That is how they mitigate loss. If you understand this, then you’ll know that you have to approach them and all conversations very carefully.

Everything can and will be used against you.

Your lender has two platoons of employees who talk with delinquent borrowers. The first is the collections department, which consists of people who try to pry money out of you and get you current on the payments. The second group consists of the loss mitigation specialists. These departments go by different names, depending on the servicer, including foreclosure prevention, loan resolution and delinquency customer service. We’ll use the most common name for the department: loss mitigation, or loss mit. It can be difficult to get through to the loss mitigation department if collection agents are discouraged from transferring calls. This is one of the benefits of having a helper, such as an attorney or a housing counselor. The first will intimidate bill collectors and the second might have contacts within the loss mitigation department.

The trick with any bank and getting a work out done is learning to navigate their phone system so as to increase your chances of getting a live person. Over the years I’ve learned some tricks that help, sometimes you hear options that you know will lead to a person like when it says “to speak to a representative press ___” but sometimes they don’t give you these options. So, you have to think, what options WOULD get a live person. For example often anything that involves new clients signing up will get a live representative…because they always want new business. You have to be a little savvy though; you can’t just tell the sales guy you called them so you could get a warm body to answer the phone!

Once you get a live person, you want to be working your way up to a decision maker. This is sometimes harder to do for a homeowner than a 3rd party. Often with the homeowner they get stonewalled at the first level, and sadly the first tier in Loss Mitigation is really a glorified collections department. They are paid hourly employee’s who have very little if not zero motivation to go the extra mile and help you get some needed comfort and relief while resolving your problem. Often they just compound the problem by being rude and demanding, telling people things like “just pay your bills”. So it’s essential that you get beyond these people and to a specialist.

Sometimes to get to this point you have to put up with the hourly employee’s through a process of filling out their forms and information. Providing them with items such as pay stubs, tax returns and a whole host of financial information. Once everything is provided, then some lenders will assign the file to someone higher up in the loss mitigation department.

The MOST crucial element to this whole process is your Budget and if you have done your due diligence, you’ll be ready . They will ask you for a detailed list of your monthly expenses. If it’s too tight, you may not get approved, if you have too much extra income you are going to have an outrageous payment plan. Don’t agree to it!

The 2nd MOST important thing you can do is DO NOT SPEND YOUR HOUSE PAYMENTS. Often people stop making their payment because they are falling behind on other bills, or they can’t quite make the whole house payment. Over the years more often than not, the people I met with still have an income coming in each month, they just can’t meet all their obligations, so while the house is falling behind they take advantage of the fact that they aren’t paying the house payment in order to catch up on other debts. THIS IS NOT WISE AT ALL. Sock away as much of that money each month as you can. Its crucial, here’s why;

If you don’t pay your mortgage for 3-4 months and your lender decides to negotiate a repayment plan or a loan modification, then they will want what is called “good faith” money for you to come to the table with. Typically this is from 30-75% and sometimes 100% of what you owe in delinquent fees and attorney fees. Often I speak with homeowners who spend all their money and have nothing to work with. If that is the case, then don’t expect them to work with you or you better have a REAAAALLLY good explanation and proof as to why you have no money to bring to the table.