The Debt Management Expert

What is a Loan Modification?
Loan modification is a process whereby a homeowner’s mortgage is modified and both lender and homeowner are bound by the new terms.
A loan modification is a process where one or more of the characteristics of a loan and/or its terms are adjusted because the homeowner is unable to make payments under the original terms or because the value of the property is worth less than the borrower owes.
Great I know what a Loan Modification is. What are the things to watch out for?

The Do’s
• If you work with a loan modification service, Do MAKE SURE YOU CHECK THEM OUT. Go to the better business bureau site www.bbb.org and research the company. Also asking for references is a good idea.
• If you are going to attempt to do your loan modification yourself, Do make sure you have all of your documents collected prior to talking with the bank.
• If you are going to attempt to do your loan modification yourself, do make sure you understand the loan modification process prior to contacting your bank.
• Do make sure you spend the time to write a convincing Hardship Letter. See Tip on How to Write a Hardship Letter.
The Don’t
• Don’t contact your bank’s collection department. They are only interested in collecting payment not helping you with modifying your loan. You must contact the loss mitigation department in the bank.
• Don’t stop making payments on your loans even if a loan modification advises you to. A reputable company will tell you to continue to make payments for as long as possible.
• Don’t rush through your loan modification application. It is critical that you do not make errors and that all forms you submit are correct.

Before you get started on the process of attempting to get your loan modified you must first understand that you will need a little patience. The typical time line for a loan modification is between 60 and 90 days.

The second thing you must understand is that you need to be very open in terms of your current financial and personal situation. Not disclosing information to your bank or third party negotiator will only lead to disappointment down the road for your loan modification.

Third, you must collect a number of documents. You should have them ready before you start the process so that the process can be expedited. You will need: Last years taxes, your original loan documentation, recent pay stubs, and recent bank statements. The information you provide for a loan modification is very similar information you provided when you received your loan in the first place.

Forth, you will need to write a hardship letter detailing why the bank should provide you a loan modification. For more information on hardships letters go to: Tips on How to Write a Hardship Letter and Sample Hardship Letter.

Fifth, be clear on what you actually can pay when it comes to your loan modification. Understand what new terms for your loan you can live with. Getting your loan modified but not being able to afford the new terms of the modified loan does not help anyone.

Finally, decide if you want to go it alone on your loan midifcation and negotiate with your bank all by yourself or hire a professional negotiator or attorney who has done a significant number of loan modifications. The banks do not want to end up with your home if they can help it but they will have their own interest at heart rather than yours. If you do decide to go with a third party to help you make sure you check references and make sure that the operation is a legitimate one.

A hardship letter is a letter written to your bank or mortgage company telling them why you can no longer afford to make the payments on your home. This letter describes your hardships and specifically what has happened that caused you to fall behind.

Based on the current credit environment, hardship letters are being used as a tool to help homeowners avoid foreclosure on their homes. The result can be a modification of the loan or the acceptance of a real-estate short sale by the bank.

Some basics to remember in writing your hard ship letter are to:
• Write the letter in your own words with feeling. Also show your appreciation for their time. A real person will be reading this.
• Be specific on your hardship. Good examples of hardships would be: A significant cut in pay or loss of employment, a medical issue that prevents you from working, or becoming a single parent with out child support.
• Provide the reason you fell behind on your monthly payments. Detail each delinquency with specific dates.
• Provide an offer to resolve the debt issue and show a willingness to cooperate in a solution to retain your home.
• Provide documents that show that your are having financial hardship. Examples could be recent late notices on bills, your taxes from the previous year and your bank statements.

For specific examples of a hardship letter you can use click here:  Sample Hardship Letter For Loan Modification

Overview
If you are a homeowner considering a loan modification, keep in mind that a bank is as interested as you are in avoiding foreclosure. If you are a borrower who can continue to make payments, a bank will make every reasonable effort to help you modify your loan. However lenders will not grant loan modifications to every applicant. If you are a borrower and you cannot show the ability to repay the loan on time and consistently for the foreseeable future, then a bank would lose more money in the process and there is little benefit for the lending institution to do a loan modification with you. Foreclosure is a better option for the bank.

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A loan modification becomes more of a liability than a foreclosure to the bank when the borrower stops making the payments. Foreclosure is designed to rectify this situation while incurring the least amount of losses from the borrower.

The notion behind turning around a liability is based on income. What amount of income can a homeowner allocate to the mortgage payment while still making ends meet? Is this a reasonable number for the bank to agree upon for a loan modification and let the homeowner stay in the house? What is the loss comparison between the proposed loan modification and the foreclosure? Can that homeowner actually make the loan modification payments that are proposed? What proof of income and cash flow is provided to back up these proposals?

If a bank agrees to a loan modification in lieu of foreclosure and the borrower still cannot make the payment, the bank is likely to lose even more. When a loan modification is agreed upon, the borrower usually has a forbearance period. The borrower’s status is also made current and past due balances are erased. Sometimes those balances are forgiven and other times they are added to the principal balance. Here is an example of the losses that the bank will take if the borrower still cannot meet the modified loan payments:

If a borrower is 90 days late when a loan modification is agreed upon and the forbearance is for three months, the bank is not receiving any payment during that time. The borrower then becomes current and is given a fresh start. But if after the loan modification is complete, the borrower starts missing payments again, the bank must now start the entire foreclosure process again.

Lenders generally will give the homeowner a few months into the loan modification before they file a notice of default, leading to foreclosure. Lenders will eventually foreclose on the property and get about the same in return at auction as they would have had they not engaged in a loan modification with the borrower. The difference is that if the property had gone into foreclosure, they would have had the money months earlier and not spent the time and resources modifying the loan. Loan modifications are very expensive to the bank, especially when they do not work, which is why banks place more stringent requirements on borrowers now to prove their ability to meet the loan modification standards in lieu of foreclosure before adjusting the terms.

More specifically, it is difficult to say exactly what the banks are looking for prior to granting a loan modification, however, ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home
• Income to pay a new negotiated payment schedule

Overview
Loan modification is not a new practice, however it is more common now due to the mortgage crisis, declining home values and the economic recession. When property values are remaining consistent or are rising, your ability to get a loan modification tends to be very difficult. When a home facing foreclosure has equity, the bank takes a minimal loss or no loss at all. With nothing to gain the bank has no interest in approving a homeowner for loan modification with a track record of financial difficulties. The lender can place the property in foreclosure, find a new homeowner who can make the payments on time and remain profitable. Banks do not want to engage in loan modifications or deal with a risky borrower in a stable economy.

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Declining property values combined with tougher lender guidelines and adjusting interest rates have resulted in the loan modification boom. No one is going to buy a home for 15%-30% above market value and no lender is going to refinance that property. Your mortgage, or mortgage-backed security, is the collateral for the note that a bank lends a borrower.

In the current economy, equity in homes has dwindled and, in many cases, has become negative. In lieu of foreclosure, banks would rather reduce the borrower’s mortgage payments and/or balance. Neither banks nor borrowers have power in these difficult times. In fact, banks and borrowers must work together to avoid foreclosure to not only keep families in their homes but also turn this recession around. Loan modification might mean immediate financial losses for our banking institutions, but the long-term mortgage payment losses are minimized versus mass foreclosures.

Millions of Americans have taken out high home equity loans against their mortgages in markets that were at the time appreciating but now have rapidly depreciated. Then, when the homeowner’s adjustable-rate mortgage (ARM) changes and the payment can no longer be made a bank will try to refinance the mortgage, only to discover there is little chance. Most homeowners believe their only option is foreclosure. Since they cannot make the payments, sell, or refinance, are there other options other than foreclosure? The first options that a bank gives are a short sale, deed in lieu of foreclosure, or forbearance agreement.

With so many homeowners wanting to keep their home and a vast supply of empty homes, the banks are forced to revisit their loan modification strategy. In today’s economy, banks are willing to engage in loan modification to keep people in their homes. They can reach many more homeowners by doing so and continue receiving monthly mortgage payments.

some essential tips that might help you save your home.

#1 Homeowner Tip = Have an experienced mortgage attorney examine your loan documents for these potential violations.

#2 Homeowner Tip The homeowner needs a complete written life of loan history to see all the bogus charges and fees included in their mortgage balance. Also, the homeowner should make sure that any inflated appraisal and/or loss of property value is calculated into the workout.

Red Flags and Things to Look Out For in Your Loan:

Start by comparing the loan you got with the one you thought you were getting. Are the terms the same? That is, is your Annual Percentage Rate (“APR”) the same as the one you were quoted? Are your total monthly payments the same as you were told they would be? Is there a prepayment penalty, and if so, were you told about this prepayment penalty?

If you have refinanced your primary residence, that is, the home your currently live in, then the first thing you should look at is the “notice of Right to Cancel” which is also called the Three Day Right of Rescission. You usually has three days after signing loan documents to change your mind and cancel the loan.

The borrower must be told of this right in writing.

If the creditor fails to properly provide notice of this right to cancel, the right of rescission may be extended for up to three years.

When the right is extended for three years you can rescind the loan at any time before three years, meaning that the loan is treated as if it never existed. Essentially, you become entitled to all profits made by the creditor as a result of this loan. This means that the creditor must refund all interest paid, all closing fees, all broker fees, and even pay for your attorney fees. As you can imagine, this amount can be quite significant.

The extended right of rescission is a powerful tool to help borrowers who have been victims of predatory lending, and helping our clients exercise this right is often the first step in holding a creditor responsible for illegal behavior.

If it is determined that no laws have been violated on your mortgage, then it’s time to approach your lender for a possible loan workout or loan modification.

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The factors they will look at are:

1. Nature of Hardship Causing Your Mortgage Problems

2. Ability to pay

3. Amount Owed

4. Equity in the property

5. Future financial situation

6. What is better for them. To foreclose or pursue a loan workout with you and or modify your loan. Meaning which approach will best benefit the lender in the long run.

A loan workout or loan modification generally occurs where the parties to a problem loan mutually agree to workout the problem by creating new and better loan terms. The hope is that the new loan will enable to the borrower to meet their obligations.

When applying for a loan modification, make a game plan on how exactly you are going to approach them. These people are trained in minimizing loss for their company and they get paid to by getting the most amount of money out of you as possible or declare that your case is un workable and foreclose on you. That is how they mitigate loss. If you understand this, then you’ll know that you have to approach them and all conversations very carefully.

Everything can and will be used against you.

Your lender has two platoons of employees who talk with delinquent borrowers. The first is the collections department, which consists of people who try to pry money out of you and get you current on the payments. The second group consists of the loss mitigation specialists. These departments go by different names, depending on the servicer, including foreclosure prevention, loan resolution and delinquency customer service. We’ll use the most common name for the department: loss mitigation, or loss mit. It can be difficult to get through to the loss mitigation department if collection agents are discouraged from transferring calls. This is one of the benefits of having a helper, such as an attorney or a housing counselor. The first will intimidate bill collectors and the second might have contacts within the loss mitigation department.

The trick with any bank and getting a work out done is learning to navigate their phone system so as to increase your chances of getting a live person. Over the years I’ve learned some tricks that help, sometimes you hear options that you know will lead to a person like when it says “to speak to a representative press ___” but sometimes they don’t give you these options. So, you have to think, what options WOULD get a live person. For example often anything that involves new clients signing up will get a live representative…because they always want new business. You have to be a little savvy though; you can’t just tell the sales guy you called them so you could get a warm body to answer the phone!

Once you get a live person, you want to be working your way up to a decision maker. This is sometimes harder to do for a homeowner than a 3rd party. Often with the homeowner they get stonewalled at the first level, and sadly the first tier in Loss Mitigation is really a glorified collections department. They are paid hourly employee’s who have very little if not zero motivation to go the extra mile and help you get some needed comfort and relief while resolving your problem. Often they just compound the problem by being rude and demanding, telling people things like “just pay your bills”. So it’s essential that you get beyond these people and to a specialist.

Sometimes to get to this point you have to put up with the hourly employee’s through a process of filling out their forms and information. Providing them with items such as pay stubs, tax returns and a whole host of financial information. Once everything is provided, then some lenders will assign the file to someone higher up in the loss mitigation department.

The MOST crucial element to this whole process is your Budget and if you have done your due diligence, you’ll be ready . They will ask you for a detailed list of your monthly expenses. If it’s too tight, you may not get approved, if you have too much extra income you are going to have an outrageous payment plan. Don’t agree to it!

The 2nd MOST important thing you can do is DO NOT SPEND YOUR HOUSE PAYMENTS. Often people stop making their payment because they are falling behind on other bills, or they can’t quite make the whole house payment. Over the years more often than not, the people I met with still have an income coming in each month, they just can’t meet all their obligations, so while the house is falling behind they take advantage of the fact that they aren’t paying the house payment in order to catch up on other debts. THIS IS NOT WISE AT ALL. Sock away as much of that money each month as you can. Its crucial, here’s why;

If you don’t pay your mortgage for 3-4 months and your lender decides to negotiate a repayment plan or a loan modification, then they will want what is called “good faith” money for you to come to the table with. Typically this is from 30-75% and sometimes 100% of what you owe in delinquent fees and attorney fees. Often I speak with homeowners who spend all their money and have nothing to work with. If that is the case, then don’t expect them to work with you or you better have a REAAAALLLY good explanation and proof as to why you have no money to bring to the table.