As published in Scotsman Guide's Residential Edition, March 2009.
Many mortgage brokers are receiving calls from clients who have heard about loan modifications. These borrowers often want to know if they can get a modification to reduce their mortgage principal, to forgive a second loan or to get a significantly lower payment.
With emerging legislative efforts by Congress; a complicated financial structure involving banks, investors and servicing companies; and myriad individual hardship situations for clients, there is no simple answer.
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It is therefore important for mortgage brokers who are considering helping clients with loan modifications to understand the key issues and to assess the value to their clients and to their own businesses.
Loan modifications rarely involve debt forgiveness or principal reduction. A modification can be structured in many ways. But to be successful in addressing the borrower’s long-term interests, it must effectively lower the monthly payments.
A loan-modification solution can be structured in any of the following ways:
A temporary reduction in the mortgage’s interest rate (i.e., forbearance)
A permanent reduction in the mortgage’s interest rate
A step-up where the mortgage’s interest rate is reduced for a certain number of years and then increases according to a pre-negotiated schedule
A loan-term extension (e.g., going from a 30-year to a 40-year loan)
Forgiveness of all or part of the foreclosure costs the lender incurred
Adding foreclosure fees and costs to the loan’s principal balance and making interest payable on the total amount
Adding foreclosure fees and costs to the loan’s principal balance without making interest payable on the total amount
Depending on clients’ individual situations, lenders may consider any combination of these solutions.
Willingness to modify a loan depends on many factors. A bank’s two main concerns tend to be homeowners’ financial hardships and their ability to repay the loan with modified terms. Lenders and investors do not want to modify a loan only to have to foreclose on the home later.
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