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Q: How do loan modifications work?
ShareThisQuestion: How do loan modifications work?
Answer: A mortgage modification can take several forms.
1. Lenders may allow borrowers to skip payments and then add the skipped payments to the amount of the loan.
2. They may reduce the interest rate charged
3. They may extend the loan term
4. They may reduce the total amount of the loan by forgiving principal
FYI: You can find out if you qualify for the government HAMP program using calculation tools and links to the loan modification criteria by clicking here on the HAMP Program Page.
If you don’t qualify for HAMP, you can still apply for a non-HAMP loan mod.
For example:
Wells Fargo loan modification activity
More than 80% of loan modifications that Wells Fargo has done in the past three months have led to lower payments for borrowers, but most involve rate reductions, the bank says.
Wells Fargo has done more than 240,000 modifications, and more than 30,000 of those have been under the Obama administration program.
CitiMortgage loan modification activity
At CitiMortgage, about 92% of modifications involve reducing rates, lengthening terms of the loan, or both. About 8% provide principal reduction.
FYI: Did you know the first offer from the bank is not the best offer?
Mike Rockwood has modified five of his own loans, including his personal residence and investment property. He has created a top-notch workbook to walk you through the steps of fighting to get the best terms on your loan modification.
Click here to get proven help with your home loan modification
Reasons getting a loan modification is a challenge and how to force your lender to negotiate
Providing relief to borrowers is complicated because of the financial interests of the parties on the other side of the loan. Many mortgages are commonly sold to investors, and borrowers’ payments are collected by servicers, which may be the original lender or a different company.
Certain types of loans cannot be modified without the investors’ approval. Lenders and investors may shy away from reducing a mortgage’s principal balance because that requires them to write down the value of the loan. But temporarily reducing interest payments while adding to the mortgage’s principal avoids any loss.
Some research suggests lenders may gain financially if they don’t modify a mortgage at all.
Another reason lenders might resist modifications is the combined impact of high re-default rates and falling property values in many markets. A lender might calculate that helping a borrower avert foreclosure now only risks a deeper loss if the house goes to foreclosure anyway a year later.
And some lenders say even if they modify loans, so many homeowners are underwater — meaning their homes are worth less than their mortgages — that some borrowers are defaulting on purpose, “walking away” after the lender has spent money and time renegotiating the loan.
“We have customers who can afford the payments but are underwater. They default not because they have to, but because it’s better for them,” says Jack Shackett, Bank of America’s head of credit-loss prevention. “They can act like they want the modification and then they still default, so they’ve stayed for three to four months in the house for free.”
The Obama administration’s plan tries to overcome some of these barriers by imposing a three-month trial period during which borrowers must pay the renegotiated mortgage, discouraging them from walking away.
Also, the emphasis under the Obama administration plan is on getting lower monthly payments for homeowners.
Servicers must follow an established process to reduce the monthly payment to no more than 31% of the borrowers’ gross monthly income. To do that, lenders will first reduce the interest rate on the loan and then extend the original term of the loan to up to 40 years.
Short-term vs. long-term help
Mounting unemployment and loss of income threaten to complicate efforts to prevent foreclosures, even for mortgages that are substantially modified. That’s why some banks and economists are pushing for short-term personal loans to the jobless, or a break for several months in making payments.
A recent Federal Reserve Bank of Boston study suggests that to reduce foreclosures, the government should shift its focus from providing mortgage help to directing more financial assistance to those who lose their jobs. The authors say one strategy might be giving loans or grants to individual homeowners for a year or two to help them through difficult periods so they don’t lose their homes.
Some lenders are already trying similar tactics on their own. Bank of America is occasionally offering temporary mortgage forgiveness for three to six months in hopes the borrower will find a new job in that time. It is pushing the government to initiate such a program nationwide.
“Our view all along is that that will be a very effective way to address the problem,” says Paul Willen, one author on the Federal Reserve study. “A lot of what’s being done is a misplaced focus on modest, long-term relief when what they need is fast, short-term, massive relief (due to job loss).”
How to force your lender to negotiate
Currently, the homeowners that get priority on their modification request, are those that are delinquent 30-60 days. You will have to make a choice between saving your home or your high credit scores.
If your servicer is giving you the runaround on getting approved, or approving you one day and then denying you the next and the clock is ticking, you should consider a street-fighting tactic to force the bank/servicer to the negotiating table by stopping the foreclosure process using a little-know government program.
This tactic will stop the foreclosure in less than a day without having to hiring an expensive attorney. Go to the Tools Page for more details on the Stop Foreclosure in Less Than Day method.
According to loan modification expert, Mike Rockwood, in a recent Q&A training session, your goal right now should be to modify your loan payment so it’s affordable for you.
Big changes by next summer
Mike says that by next summer, the loan modification process will change as more affluent, well educated people and more powerful people will be affected by the devalued housing market.
The results?
1. Lawsuits against lenders/servicers,
2. Loan modifications will be taken over by the legal departments of the lender/servicer resulting in principal reductions and settlements.
This will be the time to go back to your lender to negotiate a principal reduction.
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Click here to see if your lender/servicer is participating in the HAMP program
Source: http://www.usatoday.com/money/economy/housing/2009-09-14-mortgage-modifications-not-helping_N.htm
Before completing and sending in a loan modification package, you may want to obtain some coaching to combat the stall tactics banks/servicers are using to cut to the front of the line of other applications and get approved faster
Click here to get proven help with your home loan modification
| Homeowners – Need Some Sound Advice? | |
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Stop Foreclosure Get more help on fighting to stop a foreclosure with one of 7 options. For example, if a loan modification is not an option learn about a little-known government program that will stop a foreclosure in less than a day without an expensive attorney. Also get the latest foreclosure news around the country, read Q&As and other resources. Legally Restore Your Credit |
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