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Loan Modification...
| The Bush Administration has just recently released a statement suggesting that Lenders allow borrowers to modify the terms of their existing home loan. This has come about due to the turbulence in the current Real Estate market and from all of the individuals who are defaulting on their loans. Are you having difficulty making your monthly payments? Do you think that foreclosure may be imminent? Call us today to figure out what your options are. Time is of the essence with these situations. |
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Should I use A Loan Modification?
A loan modification is a change in the loan contract agreed to by the
lender and the borrower. The modifications getting attention now are
those designed to reduce the payment burden on borrowers faced with
impending interest rate increases that will make monthly payments
unaffordable to them. Many are subprime borrowers.
Homeowners faced with this prospect, whether they are delinquent or not,
should request a modification.
You are unlikely to get such a change if you don't ask, and you should
make the investment required to make the case. The stakes are very high:
your house and your credit.
In most cases, the decision on a modification is not made by the firm that
owns the loan. It is made by a firm servicing the loan under contract to the
owner. The owner could be a single lender, or it could be a group of
investors who own pieces of a mortgage-backed security collateralized by
a pool of loans.
Whoever owns the loan, the servicing firm is contractually obligated to find
the solution to payment problems that will minimize loss to the owner. If
the lowest-cost solution is a contract modification, that's great -- everyone
involved prefers a modification instead of a foreclosure. But if a
foreclosure would generate lower costs for the owner, the decision will be
to foreclose. The cost of foreclosure to the borrower does not enter the
decision.
Yet the decision is far from cut and dried, and it can be materially affected
by whether and how the borrower presents his case. I discussed this issue
with Warren Brasch, a lawyer who represents borrowers seeking loan
modifications. Our combined observations:
Equity: Perhaps the most important factor affecting the modification
decision is the amount of equity the borrower has in the property. If the
borrower has enough equity in the property to pay any deferred interest
plus foreclosure expenses, foreclosure is almost bound to be the
lower-cost solution.
Equity depends on property value, which the borrower is much better
positioned to know than the servicer. The borrower knows or can easily
find out how many houses in the neighborhood are for sale and what the
trend has been in recent sale prices. In a weakening market, it is easy for
the lender to overestimate value, and the borrower must prevent that.
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Moral hazard: Servicers fear that if they are liberal in granting
modifications, borrowers who don't need a modification will seek one
anyway. They protect themselves against this by entertaining modification
proposals on a case-by-case basis, while placing the burden of proof on
the borrower.
Borrowers must accept the burden of proof. In addition to the data on
property value, they need to document that they cannot afford the
payment increase that is pending, and they must document what they can
afford.
To do so, borrowers should calculate their total debt ratio: the sum of
mortgage payment, other debt payments, property taxes and
homeowner's insurance as a percent of their gross (before tax) income.
This number should be calculated as it stands now and as it would be after
the rate adjustment. It should also be calculated to demonstrate what the
borrower can afford. On the last, Brasch suggests that a servicer may be
willing to accept 45 percent as a reasonable maximum.
Servicing cost: Servicers have an interest in minimizing modifications
because they add to costs. They try to keep costs down by computerizing
the servicing process to the greatest degree possible and standardizing
customer support procedures so that low-paid and easily trained
employees can perform them.
Modifications must be handled by a special group who are more highly
trained and better-paid, and the increased cost of expanding their number
cuts into the bottom line. Hence, there is a tendency to be nonresponsive
in the hope that the borrower will go away.
Borrowers have to be persistent. Brasch said: "If a servicer says they will
call you back . . . forget about it. You need to call them and call them
constantly. They will lose your paperwork, fail to return calls, put you on
hold and then hang up. It's what they do. Keep fighting, calling, faxing.
This does work!"
In deciding whether a modification would be less costly than a foreclosure,
servicers usually ignore an asset possessed by the borrower that could tilt
the balance toward modification. This is the right to future appreciation in
the value of the borrower's house.
In exchange for a modification that might otherwise be more costly to the
owner than a foreclosure, the borrower could pledge a percent of the
future appreciation, which could shift the balance to modification.
A loan modification is a change in the loan contract agreed to by the
lender and the borrower. The modifications getting attention now are
those designed to reduce the payment burden on borrowers faced with
impending interest rate increases that will make monthly payments
unaffordable to them. Many are subprime borrowers.
Homeowners faced with this prospect, whether they are delinquent or not,
should request a modification.
You are unlikely to get such a change if you don't ask, and you should
make the investment required to make the case. The stakes are very high:
your house and your credit.
In most cases, the decision on a modification is not made by the firm that
owns the loan. It is made by a firm servicing the loan under contract to the
owner. The owner could be a single lender, or it could be a group of
investors who own pieces of a mortgage-backed security collateralized by
a pool of loans.
Whoever owns the loan, the servicing firm is contractually obligated to find
the solution to payment problems that will minimize loss to the owner. If
the lowest-cost solution is a contract modification, that's great -- everyone
involved prefers a modification instead of a foreclosure. But if a
foreclosure would generate lower costs for the owner, the decision will be
to foreclose. The cost of foreclosure to the borrower does not enter the
decision.
Yet the decision is far from cut and dried, and it can be materially affected
by whether and how the borrower presents his case. I discussed this issue
with Warren Brasch, a lawyer who represents borrowers seeking loan
modifications. Our combined observations:
Equity: Perhaps the most important factor affecting the modification
decision is the amount of equity the borrower has in the property. If the
borrower has enough equity in the property to pay any deferred interest
plus foreclosure expenses, foreclosure is almost bound to be the
lower-cost solution.
Equity depends on property value, which the borrower is much better
positioned to know than the servicer. The borrower knows or can easily
find out how many houses in the neighborhood are for sale and what the
trend has been in recent sale prices. In a weakening market, it is easy for
the lender to overestimate value, and the borrower must prevent that.
ad_icon
Moral hazard: Servicers fear that if they are liberal in granting
modifications, borrowers who don't need a modification will seek one
anyway. They protect themselves against this by entertaining modification
proposals on a case-by-case basis, while placing the burden of proof on
the borrower.
Borrowers must accept the burden of proof. In addition to the data on
property value, they need to document that they cannot afford the
payment increase that is pending, and they must document what they can
afford.
To do so, borrowers should calculate their total debt ratio: the sum of
mortgage payment, other debt payments, property taxes and
homeowner's insurance as a percent of their gross (before tax) income.
This number should be calculated as it stands now and as it would be after
the rate adjustment. It should also be calculated to demonstrate what the
borrower can afford. On the last, Brasch suggests that a servicer may be
willing to accept 45 percent as a reasonable maximum.
Servicing cost: Servicers have an interest in minimizing modifications
because they add to costs. They try to keep costs down by computerizing
the servicing process to the greatest degree possible and standardizing
customer support procedures so that low-paid and easily trained
employees can perform them.
Modifications must be handled by a special group who are more highly
trained and better-paid, and the increased cost of expanding their number
cuts into the bottom line. Hence, there is a tendency to be nonresponsive
in the hope that the borrower will go away.
Borrowers have to be persistent. Brasch said: "If a servicer says they will
call you back . . . forget about it. You need to call them and call them
constantly. They will lose your paperwork, fail to return calls, put you on
hold and then hang up. It's what they do. Keep fighting, calling, faxing.
This does work!"
In deciding whether a modification would be less costly than a foreclosure,
servicers usually ignore an asset possessed by the borrower that could tilt
the balance toward modification. This is the right to future appreciation in
the value of the borrower's house.
In exchange for a modification that might otherwise be more costly to the
owner than a foreclosure, the borrower could pledge a percent of the
future appreciation, which could shift the balance to modification.