Truth About Loan Modifications
The new Buzz word in the foreclosure prevention world is loan modification.
However the truth about loan modifications need to be told.
The terminology has always existed in the industry, it's just that it has been recently over hyped and marketed to high heaven these days by some unscrupulous marketers.
When tragedy strikes you can bet people will show up, that just poison everything in their path.
Truth about loan modifications that you need to know.
It bug's me to no end when I speak with a property owner in distress and the first thing that they say is.
Well I spoke with someone that guaranteed they could get my loan modified".
And I wonder, how someone could use those words unless it's a money back guarantee.
Usually my response is. " Do they know what lender or loan servicing company you're with"?
" No I didn't tell them"
" HUH?"
"Did you tell them whether your loan was conventional or non conforming"?
" I'm not even sure what that is"?
"Did they even ask"?
"I don't remember anything like that".
Every lender has different guidelines. Loan servicing companies are a different animal altogether.
One truth about loan modification is, yes, it is a tool that some lenders do allow....
The operative word is some.
And that seems to be some of the distortion or mis-information floating around.
Yes. Because of the amount of homeowners stuck in sub-prime hell with loans from companies that are but a horrible memory now.
There are more opportunities to get a loan modified..
But this term in and of itself has several meanings....
Loan Modifications can take several different forms. Re-amortizing the amount in arrears/default. Extending the loan terms and yes, finally reducing the rate and or payment terms.
But it's not as easy as some of the people touting the benefits make it out to be.
First and foremost you have to understand that when a loan is made it is a contract between the lender and the borrower.
Banks and note holders/ investors are very reluctant to break contracts.
How Reluctant?.
Even with some of the government incentives it's been difficult- Yes. The government also cannot break existing legal contracts.
The first round of Programs and incentives started in the Bush Administration.
A perfect example of this is a government incentive program that was devised to help homeowners that were now upside down on their mortgages due to the steep drop or... ahem... over inflated prices that were paid for their properties.
This was supposed to be a fix for homeowners who found themselves owing more than their property was now worth, in many cases just 1-2 years after purchasing.
If the lender would take a loss on the amount that the property was over-mortgaged by, (meaning the loan would be reduced by the new lower property value). The lender would then take a loss on the difference between the old higher loan, and the new loan, at the lower property value.
The government would provide some incentive to the bank for their losses.
And of course, there were other qualifying hurdles that the homeowner would have to undergo.
So what happened....
Not much.
It's like the story of the stranger that goes into a town. He see's and old man and a dog sitting on a porch. And the dog is howling.
The stranger asks the man. " Why is your dog howling?".
The man replies " Because he's sitting on a nail".
"Why doesn't he get off of it"?.
The old man say's because it doesn't hurt enough yet! ".
While some banks have gotten a wif of their non-performing portfolios and have been a little more proactive in allowing modifications.
Others....
When a property is purchased or refinanced, one of the documents that the borrower signs allows the lender to sell the note.
When this happens you could wind up now making loan payments to a loan servicing company or a new lender. Even more confusing your lender can assume the role of loan servicer only, after selling the note that they once owned.
Sometimes this can happen multiple times over the course of year or so.
On a side note: I've had people who's payments have gotten screwed up and facing loan default just behind something like this.
If this does eventually happen this forms yet another new contract between the loan servicing company and the note holder.
Loan servicing companies have strict guidelines about what they can or can't do, they are not the investor/noteholder.
When companies and consultants use the term Loan Modification it can be very mis-leading to the homeowner.
For example many modifications are not Permanent.
Yup, like I said lenders are very reluctant to change any existing legal contracts.
Think about it, if you sold someone a car on payment terms and they ran into difficulty making payments. Would you want to change the original agreement permanently?
Consider someone doing seller financing on a home.
How many do you think would want to change the agreed on contract a few years down the road once a buyer ran into difficulty?
Exactly.
By now you should see what I mean about truth about loan modifications.
In many instances a loan when modified, it goes back up gradually over a designated period of time to whatever was on the original contract.
Thing's can get even more difficult when you get into insured mortgages.
I will go into some of the complexities in regards to insured mortgages elsewhere on this site.
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