The crux and craze of loan modificationAndy Warshaw, J.D.foreclosure, loan modifications, homeownership, loss mitigation, forbearance, RESPA, TILA, financial hardship
As the economy crumbles, more and more Americans are at risk for
losing their home. Lenders and servicers are overrun by distressed
homeowners trying to avoid foreclosure. Unfortunately, lenders lack
the resources to save every homeowner and many are getting lost in
the resulting economic quagmire.
An individual's sense of pride, joy and security of
homeownership is withering away with the crippling economy. The
rate of foreclosure is staggering. But there is a way to avoid this
tragedy. That solution is a loan modification, which allows normal,
everyday people to save their home. If you are in financial
trouble, professional loan modification specialists can act as your
white knight, saving you from losing your home. It is a solution
that both lenders and borrowers champion because it benefits both
parties.
A loan modification benefits the lender because some (or all) of
the outstanding principal and interest, as well as other associated
fees, can be rolled into the new loan and, as a result, does not
result in lost revenues. Homeowners, of course, value the option to
stay in their home, even if it means making payments over a longer
period of time. A loan modification, as the U.S. Department of
Housing and Urban Development defines, is "a permanent change in
one or more of the terms of a mortgagor's loan" that "allows the
loan to be reinstated and results in payment the mortgagor can
afford." In essence, a loan modification allows homeowners to
continue living in their home while making more affordable
payments.
Try not to confuse a loan modification with other banking
concepts. A loan modification is not the same as debt
consolidation, refinancing, or even forbearance. Debt consolidation
combines multiple loans into one loan, often with a lower monthly
payment and a longer repayment period. Refinancing is a similar
concept in which the borrower pays off an existing loan with the
proceeds from a new loan. Forbearance is a process whereby the
lender temporarily changes the terms of the loan, allowing the
homeowner to get caught up on late payments. Forbearance is not a
great option for most people, because the payments increase after
the forbearance period and the terms of the loan are left
unaltered. Loan modification is a long-term solution for borrowers
with hardships that overwhelm their budgets.
The legalese
The loan modification process is a sticky and involved process.
Each lender has its own standards and procedures that make it
difficult for borrowers to manage the process on their own. To
further complicate matters, these standards and procedures are ever
changing, as laws and regulations adjust to the current economic
crisis. Both federal and state lawmakers are presently involved in
the loan modification process, further contributing to the
complexity of the rules governing the process.
There are two core pieces of federal legislation affecting the
loan modification market: the Truth-in-Lending Act (TILA) and the
Real Estate Settlement Procedures Act (RESPA). TILA was developed
to protect borrowers from predatory lending by requiring clear
disclosure of key terms of the lending agreement and the costs
associated with it. RESPA similarly requires lender disclosures of
closing costs and settlement procedures. Professional loan
modification companies sometimes use these statutes as leverage in
marketing the modification to the lender. They may also refer the
violation to an attorney to proceed against the lender.
Painting a picture
To give you an overall picture of how the loan modification process
works, it begins with a series of phone calls to the lender during
which the caller is greeted by a series of menu options, automatic
phone messages, number options and hours of unpleasant hold time
full of static-filled music. It can best be described as miserable.
By the time you finally reach a person on the telephone, you will
be redirected to a new representative who has absolutely no idea
who you are or what your file is about. They are often overburdened
with hundreds, if not thousands of files on a daily basis.
Companies such as GreenLeaf are loan modification specialists
that are there to help you. Professional loan modification
specialists are able to dedicate their full attention and expertise
to modifying your loan. They will investigate the numerous
possibilities to make your loan modification successful, with as
little stress as possible.
There are literally thousands of loan modification variations
that professionals use, depending on the borrowers circumstances.
The most common modifications available are lowering the interest
rate, establishing a fixed interest rate, forgiving payment
defaults and fees, or a combination of any or all of these.
Principal reductions are sometimes considered, but are rarely
granted.
The most prevalent method of loan modification is an interest
rate reduction, which involves establishing a fixed rate of
interest for an extended period of time. Lenders prefer this option
because it ensures that there is a continued stream of payment and
it prevents more drastic measures, such as foreclosure or a short
sale. Lenders, of course, do not want to resort to a foreclosure or
a short sale, because they stand to lose an inordinate amount of
money.
California Department of Real Estate
The California Department of Real Estate (DRE) has an exclusive
list of approved loan modification companies that can assist you.
Beware of loan modification companies that are not in compliance
with DRE regulations. The DRE requires that loan modification
companies have an approved contract and fee agreement prior to
collecting advance fees. Do not pay an advance fee to a company not
in compliance with the law. As of now, only a small percentage of
loan modification companies in California are in compliance. Please
visit the DRE Web site for a listing of approved companies.
California is one of the first states to regulate this industry,
though other states are following suit.
The crux of the decision
The loan modification process is an intricate, multifaceted
procedure. The loan modification decision is not always made by the
firm that owns the loan. Instead, the decision is often made by a
group of investors who own pieces of the mortgage-backed security.
The decisions are based upon what is the most lucrative option for
the investor, or what minimizes their losses.
A loan modification with an interest rate reduction is often the
preferred avenue. Nonetheless, foreclosure is an option if it
generates lower costs to the investor or the lender. The effect of
the foreclosure on the borrower is sadly not a consideration to the
investor and lender, though the presentation and the facts of the
borrower's condition do impact the decision. This is why it is
imperative to use a loan modification specialist to present the
strongest possible case to the lender for the modification.
The amount of equity in a home is a crucial factor affecting the
modification. The lower the equity in the home, the greater the
chances are for a modification service. The level of equity depends
on the overall property value, which a homeowner can generally
determine by comparing the sale value of other homes in the
neighborhood and the trend of the sale prices. The greater the
equity in the home, the less motivated a lender is to allow a
modification.
Other criteria considered in the loan modification process
include whether the loan is based upon an adjustable rate.
Adjustable rate loans are preferred for qualifying for the
modification. The adjustable rate should be coupled with a borrower
who is behind on payments and who has a verifiable, reduced income.
This reduced income is known as the homeowner's hardship and is
used as leverage in the modification process. The hardship is a
major consideration the lender uses in deciding whether to accept
the modification. An example of hardship is a married couple where
one of the spouses loses their job.
Solving the lender's dilemma
The housing crisis has crippled the economy, leaving many lenders
turning to financial instruments such as loan modifications that
protect their housing investments. Loan modifications are often a
win-win situation for both lender and borrower, but lenders are
careful to ensure that loan modifications continue to protect their
investment. As a result, many lenders have been flooded with phone
calls and inquiries about loan modifications, but are unable to
move quickly on the applications. Lenders are often understaffed
and unwilling to invest in new staff to handle the homeowners
questions. A loan modification company, whose only job is to assist
homeowners for a loan modification, will be able to assist you in
dealing with this stressful experience and ensure that the process
moves quickly and smoothly for you.
The future
Loan modifications are here to stay! Legislators and government
officials are pushing new proposals and legislation to save
homeownersand the economy. The Federal Deposit Insurance
Corporation recently unveiled its own proposal from Chairwoman
Sheila Bair to streamline the process. "It is imperative to provide
incentives to achieve a sufficient scale in loan modifications to
stem the reductions in housing prices and rising foreclosures,"
reported an FDIC statement on Nov. 14, 2008.
One of the key elements of the proposal is that housing payments
for the delinquent borrowers would be reduced to 31 percent of
their income. The plan would help 2.2 million borrowers in
obtaining loan modifications. Bair's proposal is commendable, but
it is only one of several options currently being considered.
However, regardless of whether the FDIC's plan is approved or
whether alternate legislation prevails, borrowers are the
beneficiaries and loan modifications are here to help keep you in
your home. The economic crisis has no immediate end in sight.
Homeowners who need to reduce their current mortgage payments
should consider loan modification using the resources of a
DRE-approved loan modification company, such as GreenLeaf.
Andy Warshaw, J.D. is an in-house representative of GreenLeaf, a loan
modification company. He may be reached at (888) 326-3303, ext.
216, e-mail
[email protected]
or through the GreenLeaf Web site at www.greenleaflegals.com.
