Explanation of changes in mortgage loans

Continued declines in home values ​​in the United States after the mid-2000s caused an increasing number of borrowers to explore the loan modification process in an attempt to avoid losing their homes to foreclosure. Unfortunately, a large number of homeowners seeking to modify their loans have been frustrated by lengthy and impersonal negotiation processes imposed by lenders, the inability of borrowers to qualify for modified loans, and the unwillingness of banks to modify loans. loans at affordable levels. Furthermore, many of the borrowers who were able to successfully navigate through the waters of loan modification later learned that their diligent efforts were ultimately in vain, as the United States Comptroller of the Currency reported that more than half of the loans modified in the first quarter of 2008 defaulted within six months. To prevent the loan modification process from beginning to resemble a wild goose chase for the Holy Grail, it’s essential to examine some of the key aspects related to loan modifications.

Loan Modification Goals

Generally speaking, the main reason borrowers seek home loan modifications is to reduce the amount of their monthly payments. This result can be achieved by lowering the interest rate on the loan, extending the repayment period on the loan, preventing an interest rate from adjusting upwards, reducing the principal balance owed, eliminating a negative repayment term, adding delinquent payments to the balance, or any combination of the above. Not surprisingly, the most sought after modification goal by borrowers is also the request lenders have been least willing to grant: principal balance reductions. While reductions in balances create significant losses for banks, it should also be noted that homeowners have generally been unwilling to continue mortgage payments when they believe their home’s value will not exceed the amount they owe. against property.

Thus, failure to reduce balances through the loan modification process, coupled with declining home values, may explain the US Comptroller of the Currency’s finding that most Loans default shortly after being modified.

The process

Although loan modification procedures and requirements vary from bank to bank, the typical process begins with the borrower contacting the bank’s loss mitigation department to request a loan modification. The lender will then send a loan modification application and forms to the borrower to complete and return to the lender. The bank will also require the borrower to provide other documentation to support the request. This documentation may include bank statements, tax returns, pay stubs, a hardship letter, and an appraisal or broker’s price opinion to show the current value of the property. After the lender has received all of the requested documentation, a bank representative or negotiator will eventually contact the borrower to propose new loan terms or simply reject the initial modification request altogether. The borrower then accepts the bank’s proposal or negotiates new terms until an agreement is reached and the new loan documents are formally executed. It is also recommended that the borrower communicate regularly with the loss mitigation department throughout the process to ensure that all documentation is received and that the change request is completed in a timely manner.

Barriers to change

The most obvious obstacle to successfully modifying a home loan is the borrower’s inability to qualify for the new modified loan. Once again, the lender’s eligibility requirements for the modification can differ greatly. However, Fannie Mae and Freddie Mae have implemented a Streamlined Modification Plan to more effectively respond to the growing number of loan modification requests. Under this plan, the borrower must meet the following criteria: 1) the borrower has not filed for bankruptcy; 2) the borrower’s existing loan originated before January 1, 2008; 3) the property securing the loan is owner-occupied and is a single-family residence; 4) the borrower is at least 90 days delinquent on the existing loan; 5) a loan-to-value ratio of 90% or more is present with the existing loan; 6) payments after modification do not exceed 38% of the borrower’s gross monthly income; and 7) the borrower must successfully make 3 consecutive monthly payments after the modification to demonstrate ability to pay before the modification is finalized.

Also, lenders generally do not have a legal obligation to modify loans for borrowers. Consequently, if a modification request becomes too expensive, banks often take a chance on the foreclosure process. Lenders may also have inadequate staff to handle the increasing number of modification requests without frequent borrower follow-up. A borrower’s property can also serve as collateral for more than one loan, and it can often be challenging to coordinate modification terms among multiple banks. Also, if the bank has sold the loan on the secondary lending market to any number of potential investors, the original loan will often be broken up into different tranches before bundling them with other loan portions such as mortgage-backed securities. In this case, it can be very difficult to coordinate with many investors to get the amendment approved.

Finally, borrowers should be tired of the myriad of fraudulent companies trying to help homeowners with the loan modification process. The mere fact that these companies use television commercials or seemingly reputable websites as advertising media should not alleviate borrowers’ concerns. The rapidly growing number of loan modification scammers has temporarily taken law enforcement by surprise and it may be some time before these culprits are apprehended and their brazen actions quelled. In the meantime, borrowers should be especially cautious when dealing with companies that require up-front fees for any service provided, as this practice itself is prohibited by most state laws.

For further assistance with the loan modification process, it is recommended that you contact an attorney or your local REALTOR®. In addition, the US Department of Housing and Urban Development maintains a list of approved housing counseling agencies at http://www.hud.gov. When a borrower attempts to personally modify a mortgage loan, it is essential to identify the modification goals, understand the particular lender’s modification requirements, frequently check the status of the application processing, and be very patient.

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