By Peter Watts
As an increasing number of home owners fall behind or go into default on their home loans, loan modifications are being touted as one of the best options available for both homeowners and lenders.
A loan modification is beneficial to the home owner because it allows the individual or family to remain in their home and grants them loan terms that allow them to keep their revised payments current.
Loan modifications can also be beneficial to banks and lenders, but in certain circumstances banks may prefer to pursue the foreclosure option. If the home is worth more than the amount owing on the first mortgage, banks may be reluctant to renegotiate the terms. If a bank believes it can pay off the mortgage in its entirety through the foreclosure process, it may make more sense for the bank to get its money back that way. Lenders may decide to enter into a negotiation that results in below-market payments, with the possibility of a foreclosure sometime in the future, as opposed to moving to foreclosure. If a house is worth substantially less than the amount of the mortgage a bank will be far more willing to negotiate.
A variety of factors will affect a borrower's ability to renegotiate a loan, among them, which bank holds the note and what type of modification is being sought. The bank that services the loan might be overwhelmed by requests, and the individuals processing the requests may not have the experience or authority to get anything done. It is not uncommon for a bank to quote a six-month process for the loan to be modified, particularly if the payments are current or only a month or two behind. A representative at a large national bank told me recently that she had more than 150 files on her desk. This is not unusual, given the current market. Because homeowners are required to provide the bank with a slew of information, it is quite possible that there are more than 100 pages of information in each file.
One of the most straightforward ways to modify a loan is to ask for a decrease in the interest rate. Many lenders are willing to decrease interest rates for qualified applicants, particularly lenders that hold a second mortgage or a home equity line of credit. In the case of a foreclosure these lenders are not likely to see any return on their loan from the sale of the property.
Lengthening the loan is another way to modify. Banks are sometimes willing to increase the length of the loan from 30 years to 40 years. While increasing the length of the loan will result in reduced monthly payments, this option also increases the total amount of repayment, since extra interest accrues over the extended period of the loan.
A principal balance reduction is one of the most difficult modifications to obtain. This involves the lender's forgiving a portion of the debt. There may be adverse tax consequences to the borrower from a principal balance reduction, so a tax professional should be consulted.
At the end of the day, homeowners seeking a modification should present their case as succinctly and convincingly as possible. It is necessary that the information demonstrate both the advantage to the lender of entering into a modification and the disadvantage to the lender of foreclosing on the property.