The Crux and Craze of Loan Modification by Andy Warshaw, J.D.

by 05 Feb 2009
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 home ownership 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 Department of Housing and Urban Development defines, is a ?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 their 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, 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. The best solution - Use a professional service company that specializes in loan modification and 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 borrower?s 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. Department of Real Estate in California An example of very strict state licensing is The Department of Real Estate in California. They have 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 advanced 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 website for a listing of approved companies. California is one of the first states to regulate this industry, though other states are rapidly 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 by the lender in deciding whether to accept the modification or not. 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 homeowners (and the economy). The FDIC 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,? the Federal Deposit Insurance Corp. said in a statement on November 14, 2008. One of the key elements of the proposal is that housing payments for the delinquent borrowers would be reduced to 31% 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 people in their homes. The economic crisis has no immediate end in sight. Homeowners who need to reduce their current mortgage payments should consider using the resources of a fully compliant loan modification service such as one approved by DRE.



Is TILA-RESPA a good or bad thing long term?