Given the terrible state of the economy and the real estate markets – and given the large number of subprime residential loans made during past years – many borrowers are looking for loan modifications as an alternative to foreclosure. Unfortunately, at least at this point there is not much that can be done for many homeowners, although this area is in flux and additional government and lender programs may become available.
Obviously there is no point paying for loan modification work unless there is a good chance to modify the loan. (Where there isn't a good chance of modification, unfortunately there are limited options, such as bankruptcy, giving the lender a deed in lieu of foreclosure, possibly finding someone to arrange a short sale of the property or walking away from the property, although all of these have drawbacks.) This article discusses what we believe makes a homeowner a good candidate for loan modification. Other attorneys may have different opinions. Our opinion also is that, because of the cost, litigation with the lender is not an option for most homeowners. Finally, this article is directed at California borrowers; each state has its own real-estate laws.
For an owner to be a good candidate for loan modification, the property must be the owner's principal residence – and not a vacation home or second home. While there are exceptions, in general most lenders are not modifying loans on vacation homes or second homes.
Also, while Notices of Default alone are OK, no foreclosure sale should be set yet. Many lenders write off the loans when they set a foreclosure sale and therefore become very hard to work with respect to loan modifications.
If the loan has been modified previously, it probably cannot be modified again (although there are some exceptions if there is no waiver of rights in the prior loan modification and other conditions are met).
Neither spouse may be out of work or expected to lose their job in the near term (unless the unemployed spouse's income was not used to get the loan, which is unlikely).
Often no decrease in the interest rate is possible if the loan is already at a fixed rate of 6% or less, although a longer loan-term (an increase in the amortization term) may be possible.
In addition, for an owner to be a good candidate at least one of the following must be present:
- The current value of the home must be less than the loan against it.
- There must be an upcoming or relatively recent interest-rate increase or a recalculation (recasting) of the loan causing higher monthly payments.
- There is past hardship (death of spouse, loss of job, sickness, etc.) that has been resolved.
- There is a substantial lending violation, for example, a violation of the Truth-In-Lending law or RESPA. (This is usually not something an owner can determine.)
Further, after modification, the borrower must have no more than an 80% debt to income ratio (for example, $100,000 annual income and $80,000 in annual debt payments). It's possible to run trial figures using a fixed 6% rate for 30 years and an online mortgage calculator. One place that mortgage calculators are available are at http://www.mortgage-net.com/calculators/.
If a loan modification occurs it usually is in the form of a decrease in the interest rate. At times, it may be possible to also extend the term of the loan from 30 to 40 years, but this depends on the lender. Owners should realize that reductions in the principal of the loan are very rare. Certainly if there is any equity in the property a principal reduction is not possible. Sometimes a principal reduction is possible if a spouse has died or there is a major (far beyond the usual) lending violation. Even then, often the value of the property must so much less than the balance owed that there is no reason for the owner not to walk away.
An owner who seems to be a good candidate for loan modification should try to find an attorney or loan modification company who will make a more thorough review of the loan documents, etc. and give an opinion about the chances for loan modification (although there will usually be a charge for that) before committing to a full agreement for loan modification services.
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