Loan modifications are certainly becoming the primary path of homeowners in trouble. Both the government and banks are coming to the consensus that this is the best way to help work out troubled assets. This of course presents opportunity for experienced loan officers to assist in the loan modification process.
Understanding Loan Modifications
Doing loan modifications are not that unlike counseling for a mortgage refinance. In fact they are often called modified refinance. Your objective is very similar to mortgage refinancing. You are helping a homeowner achieve a more affordable mortgage payment.
The difference comes in when a borrower is constrained in their financial hardship to the mortgage they have. Often they are in a position that prevents them from doing a traditional refinance. For example, their income has changed, the current ARM has adjusted and increased the payment, or their home has depreciated.
This leaves the borrower with loan modification as their only option, with a modification being the change in the original mortgage terms. Often it includes the following changes:
- Change from an adjustable rate to a fixed rate mortgage
- Reduction or temporary freezing of mortgage interest rate
- Extension of amortization term and maturity date
- Reduction in unpaid principle balance
- Few month extension before commence foreclosure proceedings
What is the Objective of a Loan Modification?
The objective of a loan modification for the borrower is simple–obtain a payment that they can make every month.
However, for the lender the objective of the loan modification is a bit more complex. This is where your negotiation on behalf of the borrower should add value. To make this easier most loan modification programs are setting a “benchmark ratio” or debt-to-income ratio that defines “affordable payment.” Most are being set at 38 percent.
Banks and servicers are focused on a few key points in the loan, and so should you be in negotiating:
- Regular and timely payment
- Current income (this is particularly important to securitized [servicer] assets)–this is the interest portion of the homeowners payment
- Minimizing write-downs or current losses in the mortgage
As an experienced loan officer you should be able to propose a restructuring of the loan that balances the best interests of all parties.
Who Can Offer a Loan Modification?
This is also a very important part of your loan modification business. The only people that can “do” a loan modification for a homeowner is the bank, servicer(s), or investor(s) that are holding the loan. Unlike a mortgage refinance you can not shop around for the best bank deal. A consumer or a company operating on behalf of consumers (usually required to have legal counsel) must contact one of holders of the original loan and attempt to negotiate a loan workout.
Therefore, it behooves you to build strong relationships and contacts with the top entities currently offering loan modifications to their mortgagees:
- IndyMac Federal Bank
- Citigroup
- JP Morgan Chase
- Bank of America/Countrywide
- Fannie Mae and Freddie Mac
You should also familiarize yourself with the parameters of each of these programs. Each is slightly different. The more familiar you are the more streamlined the process can be for your loan modification client.
