Buoyed by new government plans, more loans will be adjusted to fit borrower needs. Here's how -- and why

Carol Beaumier, executive vice president and team leader, and Michael Brauneis, director, Protiviti

As published in Scotsman Guide's Residential Edition, April 2009.

The Obama administration's announcements of its Homeowner Affordability and Stability and Making Home Affordable plans confirmed what many brokers already knew and others already dreaded: Loan modifications likely are a large part of the government's strategy to soothe the housing market and economy.

In addition to supporting judicial modifications of mortgages for borrowers facing bankruptcy, the plan also backs incentives for lenders and servicers to modify loan terms early and calls for clear industry guidelines on how to do so.

Whether you've faced many loan mods in recent months or are struggling with your first, now is the time to learn how they work and what road lies ahead.

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With real estate prices falling, financial-service firms collapsing and a variety of industries laying off thousands of workers, the need for residential loan modifications continues. According to consumer activists, media outlets, legislators and regulators, a great number of at-risk borrowers would be able and willing to make their payments if given more-reasonable terms.

Those borrowers, however, aren't paying their mortgages now or would not be able to do so in the near future. Borrowers with hybrid ARMs, option ARMs and interest-only products comprise some of the largest at-risk groups.

The disproportionate use of ARMs in higher-cost real estate markets such as California and
Florida -- already among the hardest-hit in the foreclosure crisis -- exacerbates the potential scope of the problem. Without stemming the foreclosure tide, more defaults and home-price drops are likely to follow.

Although many of the country's largest banks and mortgage servicers -- including Fannie Mae and Freddie Mac, the former government-sponsored enterprises now under conservatorship -- have or are in the process of introducing large-scale loan-modification programs, critics believe strongly that the industry itself has not done enough to take advantage of the opportunity to modify unaffordable loans on a large-scale basis.

President Obama's plans also are viewed as just the start of the ride, with elements calling for numerous government groups and mortgage professionals themselves to adopt new practices.

Modification types

At the moment, there are three major modification types used and discussed.

1. Case-by-case analysis: With this approach, servicers generally handle delinquencies as they have in the past. Individual collectors and/or workout specialists contact borrowers, learn their financial circumstances and work to develop a solution to address those circumstances.

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