Everyday people come into my office saying that they have been working on a loan modification for months or even years. They have applied for the Home Affordable Modification Program (“HAMP”). They have done trial modifications, then been denied. They have then applied for the lender’s “in house” modification program, then been denied. They have gone to NACA and been denied. Some people hire mortgage attorneys to file suit against the lenders. The bottom line is that most loan modifications don’t work. Why?
First, a loan modification does not reduce the balance on the loan. 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 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.
Second, a loan modification will require 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 in all likelihood will 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.
Third, a loan modification payment will again start with a teaser interest rate of 2%-2.5% and then rise over time. Furthermore, if you miss any payments on the loan modification, the lender in many cases has the right to go back to the original payment terms and resume the foreclosure from the prior point without starting over.
Fourth, a loan modification requires documented income sufficient to qualify for a real loan i.e. either a 30 or 40 year fixed loan. If a borrower did not qualify for a 30 year fixed 5 years ago, how are they going to qualify now? If a person 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.
Fifth, even 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 lenders are being paid to work on modifications. The loans are in default. They are receiving default servicing fees. They are in no rush to do a loan modification.
Sixth, there is no requirement for lenders to do loan modifications. The lender can do the “Net Present Value Test” and simply say “no” to the requested modification. As a practical matter, this means that the lender looks at 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. Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want to “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. Where loan modification make the most sense is where the balance on the first mortgage is close to the fair market value of the property and the borrowers have the ability to pay on a real loan i.e. a 30 year fixed with an impound for property taxes and insurance. If you are considering 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 and the other options available to you. In see people for free 30 minute consultations in my offices located in Walnut Creek, Antioch and Brentwood.
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