REAL ESTATE
Home Owner's Option: Loan Modification
In the current economic downturn, many home owners are hit with the double whammy of financial stress and falling home prices. When it no longer makes sense to pay off a huge mortgage on a home that has lost a big part of its value, many home owners resign themselves to foreclosure. Don’t throw in the towel yet, advises attorney Mahesh Bajoria, and consider whether a loan modification could work for you.
Here are some FAQs about loan modification, which may provide a respite to financially stressed homeowners saddled with a massive mortgage over a home whose value as plummeted
Q: What is loan modification?
A: Everybody is talking about loan modification. The question comes up as to what is loan modification. In simple terms, when a loan is modified, it is called modification. Who does the loan modification? It is the lender. Therefore, a loan modification happens when the bank or the lender who has lent money to the borrower modifies the terms of the mortgage due to financial hardship of the borrower. The loan is restructured and the terms of the loan are modified so that the borrower can afford to make the payments. It is an agreement between the lender and the borrower home owner on new terms and conditions of the loan which helps both the borrower and the lender mitigate their losses mutually. Loan modification is not same as a loan refinance, debt consolidation or forbearance agreement.
Q: What does the home owner/borrower want through loan modification?
A: Generally the homeowner always wants to keep the house and does not want to give it back to the bank through foreclosure or otherwise. The home owner always would like to keep the house if it is within his affordable range. The mortgage payments might have increased due to an adjustable rate; the fixed-rate interest only loan might have become adjustable; the value of the property might have dropped below the loan amount; the home owner may not have required income or resources to meet the current payments; but still the home owner wants to retain the house by making lower payments which he or she can afford based on his or her current financial position.
In these circumstances, the home owner is better off retaining the house and making lower payments that he can afford based on an agreement with the lender or the bank than losing the home to foreclosure and ruining his credit.
In some circumstances where loan refinance or short sale is not an option, loan modification may work out better.
Q: When would the lender like to do with loan modification?
A: The lenders or the banks always want to mitigate their losses. They do not want to foreclose the property, or own the property and sell. They want to mitigate or reduce their losses. Foreclosures cost a lot of money by way of legal fees, and other related expenses to the banks. They do not want to own or run the properties as they are in the business of lending money and not owning and running properties, which includes facing risks associated with it. They would like to minimize their risks and like to work with the borrowers as long as they are convinced that it is a wise business decision to let the home owner keep the house if the home owner can afford to make the payments as per his or her financial ability after the loan modification is done.
In some instances banks or lenders are in a worse position after foreclosure than before. They might not be able to sell the houses at the current fallen home prices for a long time. They might have to maintain the property and incur all the costs and expenses associated with owning the house until the house is sold. This might be a bigger headache and bigger loss than allowing the home owner to retain the house by modifying the loan terms for mutual benefit. By doing loan modification, the banks may roll up all or part of their principal, interest, cost, fees etc into the terms of the loan modification over the life of the loan or a longer period of time and as such this not lost revenue to the bank or the lender.
Q: What are the forms of loan modification?
A: Loan modification can take any of the following forms:
- Reduction in the rate of interest
- Change of adjustable rate to fixed rate of interest
- Deferment of the interest and or principal payments for a specified period
- Deferment of interest or principal till the house is sold or transferred
- Decrease in amount of principal payments
- Decrease in amount of interest payments
- Change of amortization of the loan term, like from 30 years to 40 years
- Write down of the principal loan amount
Q: How does the loan modification help?
A: Loan modification helps the borrower retain his or her home. It makes the payments by the borrower more affordable based on his financial hardships. It protects the credit of the borrowers. It helps stop the foreclosure of the property. Banks or lenders are also happy as they have also minimized their losses by not foreclosing the property and not spending money on costs and fees associated with the foreclosure of the property. They minimize their losses by letting the home owners make lower payments currently and realize their costs and past due interest in the long run as the payments are spread over a longer period of time. As a result, the modification helps both the lender and the homeowner. Home owners can retain their houses and credit ratings. Banks also have fewer foreclosure and defaults in their investment portfolio.
Q: Is there help from the government?
A: With the downturn in economy, job losses, falling home prices and other related factors, many home owners are not in a position to make mortgage payments and retain their homes. The government is giving help to the financial institutions to bail them out from the present crisis. Calif. Gov. Arnold Schwarzenegger, recently announced a 90-day moratorium on home foreclosures in California. There are guidelines by Fannie Mae and Freddie Mac.
Q: Can I do my own loan modification?
A: There is nothing that prevents you from doing your own loan modification by approaching the banks. However, you might not be very knowledgeable regarding the legal issues and other terms associated in the process. You might not be able to negotiate the best terms of your own loan modification. You should consider hiring a professional or a licensed attorney to represent you in loan modification before the lenders.
Beware of unscrupulous companies in the marketplace who are not properly licensed to represent you. In California, one should be an attorney licensed by the State Bar of California or approved by the state Department of Real Estate.
Q: Do I need to hire an attorney for the loan modification?
A: Banks or lenders receive a number of applications for loan modifications every day from home owners or on behalf of home owners. Banks or lenders tend to pay closer attention to attorneys. The fear of time-consuming, protracted and expensive litigation may give lenders a reason to work on cases where attorneys are involved.
Moreover, if there are issues regarding proper loan documentations, violation of legal rules and procedures, violations of Truth in Lending Act, or others by the lender, then the attorney might be able to litigate the issues in a court of law.
(The above views are general comments and should not be construed as personal counsel. Readers are advised to consult own legal counsel before making any determination on their individual situations).
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Mahesh Bajoria is an attorney practicing law in Fremont, Calif.
