What help can you expect to receive from a lender or loan servicer?
Within the past year you may have read numerous articles or seen reports on the news as to the difficulty that homeowners are currently facing when they attempt to get their mortgage loan modified. These reports come from numerous sources, including loan modification companies and attorneys attempting to obtain more business. Simultaneously, the Federal Government and current presidential administration announced new programs aimed at assisting home owners in obtaining loan modifications. These new programs were going to “solve homeowner woes and save their homes” yet a closer look at the programs reveals little benefit to most homeowners. A few months later, numerous reports surfaced, reporting that the modification programs were just not working as designed, foreclosures continued and even increased and currently homeowners are still not getting the help the so desperately need. In addition, new laws were enforced in states like California which prohibit modification companies from collecting upfront fees for assisting homeowners with their modifications and these companies quickly developed a very bad reputation. Perhaps it was the bad press, perhaps it was the fact that some companies really were taking advantage of desperate individuals; perhaps it is all a big conspiracy. What is the truth? The truth may be hard to come by in it’s entirely but hopefully this will shed some light on the issue. The loans discussed herein are primarily loans which have been securitized (sold to investors as opposed to held by a bank in their private portfolio).
What help can you expect to receive from a lender or loan servicer?
Traditionally, if a homeowner were to fall behind on a mortgage, there are very few programs in place to help them bring their loan current. Once you have fallen behind, your credit rating usually makes it difficult or impossible to refinance your loan and very few want to entertain the idea of filing bankruptcy. The first option usually made available through the borrower’s lender is what is known as a forbearance agreement. Essentially, it makes it possible for a borrower to catch up on the late payments by paying extra each month for a set period of time until the loan is brought current. As you may imagine, this is sometimes a difficult thing for a borrower to accomplish since they were likely to have fallen behind due to financial issues and coming up with extra funds is somewhat of a hardship. The main issue with this option in regard to loan modifications is simple. If a borrower takes the forbearance agreement and is able to make all the payments as agreed upon, then in the eyes of the lender there is no need to modify their loan as they are clearly able to make their payments as originally signed when the mortgage was granted.
In more recent years, the Loan Modification program has become more and more prevalent. In this program, a lender will offer a borrower an actual loan modification. The offer almost always contains an interest rate reduction in order to achieve a more affordable payment. The offer may be for a period of months or years and depends upon each individual borrower and lender. The main issue with these offers is that once your time period for the new payment has expired, the borrower often finds themselves back in the same position they were in to begin with.
The latest loan modification offer is coming straight from Fannie Mae and Freddie Mac. If a borrower’s loan is owned by one of these to companies, the servicer may offer a trial period for the borrower to make a new payment over the course of 3 months. If the borrower is successful, the servicer’s are supposed to offer a loan modification. The statistics on this programs success are still hard to interpret as the program is quite new. The thing to be aware of as a borrower under these program guidelines is this: if you are offered a principle reduction under your new loan modification, you are not simply off the hook for those funds. If you sell your home or when your mortgage is paid off, you must reimburse the company the amount of principle reduction. Essentially, you are not being offered a principle reduction at all, you are just not paying against that amount of borrowed money, for now.
Why Aren’t Servicers helping more homeowners?
This is a good question, with a complex answer that may be difficult for those outside of the industry to fully understand. When a lender closes a loan they often sell it to an investor as opposed to keeping it in their loan portfolio. This is known as securitizing a loan. However, loans are not sold individually to an investor but rather they are pooled together with other loans. It is a quite complex transaction and involves much more than that, but simply put, these securitized loans is what is making the modification process much more difficult. There are agreements in place when the loan is securitized to protect all interested parties and one specific agreement relates directly to individual loan modifications. Essentially, it will allow the servicer of the loan to modify the loan, if a default is imminent or likely, however it prohibits a modification from occurring if the borrower is current and/or up to date on payments. This is the reason why so many borrower’s who attempt to modify their loans prior to defaulting find that the servicers are telling them they must be delinquent (sometimes up to four month or even to the point of a notice of default being filed against the property) prior to a modification even being entertained. Although frustrating, it makes sense from the servicer’s standpoint.
It may be hard for some to understand and it often a discussion had between people in the industry and homeowners but let’s explain it from a lender’s standpoint. Many people bought their homes at the peak of the market, when appreciation was ripe and anticipated to continue. A borrower applied for a loan, met all underwriting guidelines and took out a mortgage loan. A few years have now passed and their property is not worth anywhere near what they originally paid for it. They are upset by this loss and rightfully so. However, this decline is not at the fault of their particular investor who now owns the loan (although some may argue that it is but that is something we will not get into at this time). From any profitability standpoint, if a borrower is completely current, is showing the ability to repay the loan at the terms they agreed and signed to, why should any servicer change those terms simply because “other people got a modification” or “the borrower is unhappy with the current real estate market”. They shouldn’t and they won’t!
In addition to the issues above creating road blocks on the path to modification, there are further requirements of a loan servicer that requires them protect their interest even further. Loan servicers are often required to make principle and interest advances on specific dates with respect to the mortgage loans it services. It is another complex issue but essentially, a servicer must pay what is owed on the loan to the investor regardless if they have received the funds from the borrower as long as within its business judgment that advance will be recoverable. However, they do not have to pay this advance on a property that has been taken back (an REO). So if a servicer is constantly using its own funds due to the fact that a borrower has defaulted on payments, it is actually in their best interest to have the property foreclosed upon as opposed to paying the advances. After all, the servicer does not actually own the loan, but rather collects and allocates the payments on the loan.
What’s the best option for the servicer?
Regardless of what borrowers may want in today’s difficult economy, the servicing agent is going to look out for themselves and the investors they represent. Essentially, prior to approving or denying a loan modification, the servicer is going to determine their best option, not yours!
Which of these three options will return the most income to the Investor?
• Make no modification and leave the loan as is. What is the likelihood of the borrower defaulting? Will the borrower repay the loan as agreed? What is the potential income for the investor in present dollars?
• Modify the loan and determine the income for the investor in present dollars
• Foreclose on the property and determine the income to the investor in present dollars (after all fees, costs, losses, etc are taken in to consideration)
A borrower can be assured that if the first option is a viable option that is exactly what the servicer will do.
The servicer will also determine which option will result in their reimbursement of the advances they paid as previously discussed. Unfortunately, it is usually in the best interest of the servicer to either leave the loan as is or foreclose on the property which is what makes it so difficult for a borrower to successfully modify their loan. However, don’t be completely discouraged, modifications are obtainable, and options are out there. The greatest tool to everyone is knowledge. Know where you stand, know what options are available. If your home has appreciated so greatly that the lender will take a significant hit by foreclosing on your property, keep that in mind and use it to your benefit. The best advice that can be given is to keep fighting, and when possible, obtain someone you trust and feel comfortable with to go to bat for you. I can almost guarantee you that you do not know all the ins and outs of the process no matter how much research you do and the representation of another will likely yield you better results. If nothing else, keep trying. Ask questions and determine what the servicer’s specific guidelines are for modifications. It is possible, just not for everyone.
