In the last column, I discussed the “overall” problems with loan modifications. Specifically, that most of the programs do not give any meaningful modification to the loan and there is no “upfront” approval or denial of the modification prior to entering into the trial modifications payments.
Since the column was published, I have received many calls wanting to know more nuts and bolts information about the current state of loan modification programs. So here is what I know after 2 years.
1. Income- The borrower needs to have documented income. If the borrower does not receive a regular paycheck, monies need to be going through a bank account to show income. Loan modifications are much harder for self-employed individuals.
2. Loan Modification Payments include payment of principal. Therefore, if you have an option arm loan (also known as a pick-a-payment) or an interest only loan, the loan modification payment will in all likelihood be higher than your prior payment amount. Also, loan modification payments will include an impound for taxes and insurance which will further increase the monthly payment.
3. There are no principal balance reductions. The best we have seen is where the investor waives the accrued interest on the loan. If a person tells you they got a principal reduction, it is usually means that a portion of the loan balance is now a silent second which will need to be paid at the time of sale of the property or as a balloon payment later.
4. A trial modification does not guarantee a permanent modification. I have clients who have been in trial modifications for over 1 year with no permanent modification. The word on the street is that “new” people who are applying for modifications will have their underwriting done prior to starting the trial modification and that the modification is guaranteed. However, I will believe it when I see it.
5. Consider filing bankruptcy to discharge credit card and other unsecured debt before applying for loan modification. When you apply for a loan modification, the lender will run your credit. While a low credit score will not prevent a modification, the less unsecured debt you have, the more money you will have available to make the modification payments. A Chapter 13 may also be available to avoid a junior lien on your home.
6. Net Present Value Test. This is the mystery calculation used by investors to determine whether a loan modification should approved. What we do know is that the borrower’s long term ability to pay on a modification combined with the present value of the investor’s investment i.e. the collateral weighs heavily in the calculation. Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want “get out” now, is very high. On the other hand, if the value of the investment is very low at this time i.e. the value of the home is low, the lender will be more inclined to approve the modification.
In conclusion, most loan modifications make no sense for borrowers. There will be no principal reduction or long term payment reduction. However, if you are considering a a default on your home or considering a loan modification, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision.
*WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.
© 2010 Joan Grimes