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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2008

The Lowdown on Loan Mods

The increase in foreclosure-prone borrowers presents opportunities for shrewd originators

As loan originations continue to stagnate, mortgage brokers are continually trying to find ways to increase business. One option for brokers is helping clients who risk foreclosure.

Many mortgage brokers are finding that adding loan-modification services to their company’s offerings not only helps their clients keep their homes but also saves their own businesses. Brokers can now help borrowers who have low FICO scores, who are late on their mortgage payments or who owe more than their home is worth -- rather than simply turning those clients away.

Brokers who wish to offer these services to their clients may find that partnering with a loan-modification company is an effective way to do so. First, though, you must understand the ins and outs of loan modifications and what the process entails.

What’s a loan mod?

A loan modification essentially renegotiates and restructures an existing home mortgage. It also is called a workout plan. If you’ve ever called to have a credit card’s interest rate reduced, then you’ve done a loan modification. The mortgage version is slightly more complicated, however.

Loan modifications may include completely forgiving missed payments or moving them to the end of the loan’s term. It can also include freezing or reducing an interest rate for a short term or through the loan’s maturity date. In rare cases, lenders even reduce a loan’s principal balance to match the home’s current market value.

Some of the more-dramatic modifications will include all three: a principal-balance reduction, forgiving missed payments and freezing or lowering an interest rate.

The process

If a borrower already has received a notice of default, is in foreclosure, is in active bankruptcy or has a sale date already scheduled, then it is best to refer the client to a real estate attorney. Because of these cases’ complexities and legalities, most brokers do not involve themselves. Brokers should check their state laws in these instances.

When borrowers do not have a default notice, are not in active bankruptcy, have an income to cover the loan modification’s terms and can demonstrate a current hardship, however, brokers often can help. These situations offer brokers the greatest chance of producing a positive resolution for their clients.

Most homeowners are unaware that loan modifications are an option that can save their home and credit scores. Therefore, brokers must educate clients before selling them on the process.

When starting the process, mortgage brokers must first interview the prospective client to make sure there is a strong case for loan modification. They usually complete a summary sheet, which is then sent to a loan-modification professional to weigh the viability of a successful modification.

Some borrowers have such a strong case that it is apparent on the first call, and a file is immediately opened. The file is then transferred to a loan-modification department that assesses the viability of a positive outcome based on the situation and on the lender that carries the note.

If the borrowers meet the preliminary criteria, a file is sent to processing, and a processor, paralegal or attorney contacts borrowers to start the process. Income documentation, all household expenses, a hardship letter and other essential items are gathered and submitted per the lender’s requirements.

A workout plan is then proposed to the lender, and the negotiation process begins. This process may take between two and 10 weeks, depending on the lender.

The pros and cons

One positive aspect of loan modification is that it is saving many homeowners from foreclosure. Although homeowners end up repaying almost three times what they had originally borrowed, if the lender forgives a few missed payments, drops the interest rate or lowers the principal balance, there is a good chance they will be able to stay in the loan and in their home.

There also is a good chance that if a lender proceeds with a foreclosure, it will typically lose money with no possibility for profit, especially when clients owe more than the home is worth. By negotiating, the bank maintains a profit, families keep their homes, and the surrounding neighborhood’s value is protected by stopping the foreclosure and subsequent short sale. Further, loan modifications can help save the real estate economy and may help to stabilize the volatile mortgage situation.

Along with great outcomes, there also are horror stories when it comes to loan modification. Many homeowners have tried to modify their own loans with little success. Others have been bilked by unscrupulous companies that were only interested in the upfront money. This is a part of the industry that is in a gray area regarding legislation and consumer protection.

When choosing a loan-modification company with which to work, brokers and borrowers must do their research to ensure they are dealing with a legitimate agency. There are typically no guarantees for a positive outcome, and honest brokers will inform their prospective clients of this.

In addition, borrowers must realize that most lenders will only allow one resolution, whether positive or negative, every 12 months. So it is imperative that their case be presented properly the first time. Choosing a legitimate loan-modification company can help ensure this happens.

The opportunity

Some borrowers find it frustrating to even contact a lender’s loss-mitigation department. If they call their lender, they typically reach a sales or refinancing department and are told that loan modification is not an option.

In other cases, borrowers are behind on their payments and the collections department is calling them. Frustration sets in, and the client starts packing boxes with a foreclosure looming.

Most clients in these situations are not aware that they have not actually received a resolution and that a loan-modification company may still be able to negotiate on their behalf with the chance at a positive outcome still possible.

One difficulty is that each lender has different guidelines for loan modifications. Further, these guidelines seem to change weekly in this case-by-case industry. Even experienced brokers have had a difficult time trying to establish relationships and lines of communication with lenders, and they usually end up spinning their wheels trying to originate and process at the same time.

Successful brokers have found that by contracting with an established loan-modification processing company, they are up to speed within weeks.

In short, mortgage professionals can offer loan modifications to clients in distress. Not only can these brokers stay in business and see higher profits, but they also can make a difference in someone’s life.


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