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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2009

The Benefits of Referring Loan Mods

Counseling clients nearing default or foreclosure can earn brokers new and continuing business

Many homeowners live  paycheck-to-paycheck. In today's economy, this places many at great risk when they face reduced income or increased debt from hardship conditions. These hardship conditions can include job loss or reduction in paid hours, illness or injury, and marital or family difficulties. Any one of these situations can directly affect whether borrowers can make their mortgage payments.

After a homeowner misses a mortgage payment, the mortgage company starts calling. If delinquent payments continue, and the homeowner cannot get current, the mortgage company keeps calling. This often goes on until the communication channel breaks down. Either the home-owner stops answering the calls or the lender stops calling.

Even when communication stops, however, foreclosure doesn't have to be the next step. In fact, mortgage brokers can look to third-party loan-modification experts for help with clients who are behind on their mortgages.

Brokers who work with and recommend loan-modification experts can help homeowners deal with hardships and avoid foreclosure. For brokers, this also can lead to repeat business and increased referrals.

Who qualifies?

Although most borrowers don't want to lose their homes, some who face foreclosure will walk away. Often, these people receive phone calls from real estate investors who want to buy their property, real estate agents who want to list their property for short sales and attorneys who advise them to file for bankruptcy. Many of these homeowners, however, don't realize that modifying their loan terms can take less time, cost the same amount of money and produce more-favorable results than bankruptcy.

As brokers determine which clients to refer to third-party loan-modification companies, they should consider the following basic requirements:

  • The homeowners must intend to remain in the property.
  • The homeowners must have experienced a financial hardship since their current loan was originated. Hardships can take many forms, including a change in the loan rate on an adjustable-rate mortgage. A decrease in property value, however, is not considered a financial hardship.
  • The homeowners must have the capacity to repay the modified payment. Keep in mind that stated income is not permitted when it comes to loan modification. Income verification is critical.

Many lenders also prioritize modifications for past-due homeowners. Sometimes, lenders' sense of urgency increases with more-delinquent customers. Even so, homeowners facing imminent default may qualify even though they aren't yet behind in their mortgage payments.

The process

Although many lenders have loss-mitigation departments, most lack the resources to staff and operate a loan-modification division adequately. Some lenders are seeing thousands of delinquent accounts each month, far more than their limited staffs can service. An experienced loan-modification company can facilitate and streamline the process.

Generally, the loan-modification process goes through the following steps:

  • Homeowners who meet the minimum requirements for modification are identified and enter a contract with the service-provider.
  • The lender is contacted for its most-recent submission requirements. Lenders often change these requirements regularly.
  • Pertinent information for the loan-modification submission is collected from the homeowners. This can include check stubs, mortgage statements, tax returns and hardship letters.
  • The packet, including the formal modification proposal, is submitted to the lender.
  • Regular contact is made with the lender to follow up on the proposal. Although the lender generally will require a minimum of 30 days to review the proposal, follow-up should be done weekly in the event that additional information is required.
  • The lender will make a decision based on its guidelines. Typically, it will send documents directly to the homeowners. The homeowners will be instructed to review and sign the documents and send them back to the lender. If homeowners need additional assistance, further negotiations with the lender are necessary to identify the homeowners' issues with the proposal.

Potential outcomes

The lender's focus should be to lower the monthly payment so that homeowners can continue to make payments and stay in the home. There are numerous ways to accomplish this, including:

  • Decreasing the interest rate, which is the most likely outcome;
  • Changing from an adjustable-rate to a fixed-rate mortgage;
  • Extending the loan term;
  • Partitioning the principal so that interest and payments are due only on part of it, with the remainder interest-free until the loan is repaid;
  • Reducing the principal owed; and
  • Allocating any past-due amounts and penalties to the loan's remaining unpaid balance.

One typical modification includes a five-year reduction in the interest rate, which helps make payments more affordable and allows homeowners to ride out the current housing and mortgage markets.

Choosing a partner

Because the results are critical to all parties -- and to the referring broker's reputation -- choosing the right affiliate relationship is key. Brokers should seek third-party loan-modification companies with proven abilities and transparent operating histories.

Here are some important things to consider when deciding to partner with a third-party loan-modification company:

  • Licensing: Providers must have the correct state licensing and in some cases an attorney-backed network to accommodate all modification scenarios.
  • Technology: Providers should have the latest technology to help expedite modification proposals, pipeline review and more.
  • Knowledge: Providers should have adequate industry experience and should understand lenders' guidelines.

Though loan modification won't be feasible for every troubled homeowner, a good modification company will provide ethical and sustainable foreclosure alternatives for many. By choosing the right companies with which to partner, brokers can build their professional relationships, increase their referrals and concentrate on closing new loans.


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