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Toxic Loan Modifications - There Are Better Options!

Home Builder with Mortgage Settlement Consultants


Toxic Loan Modifications - There Are Better Options!  While Loan Modifications have been one of the most touted concepts in the recent real estate market, Loan Modifications are programs that do little to help the homeowner in the long-run.  Loan Modifications are designed by the lenders, and are designed primarily to benefit the lender, not the homeowner.  In many ways Loan Modifications are as toxic as the loans that have created the need for modifications.

Studies have shown that over 87% of homeowners who successfully obtain Loan Modifications end up in trouble with their mortgage again within 12 months.  And even for the small percentage that do manage to keep up on their mortgage in the short run, they eventually end up right back where they were in terms of mortgage payment and principle balance. 

Typical Loan Modifications reduce the interest rate and payment to a manageable level for the homeowner.  But then they are designed to automatically readjust the rate and payment every year for five years until the rate and payment are back to where they were before the loan modification. 

Sound like a lot of smoke and mirrors?  As I said in the beginning, Loan Modifications are designed by the banks, for the banks.  The goal (for the banks) is to keep the homeowner making payments until the subject property’s equity HOPEFULLY comes back.  But the homeowner is still left owning more than their home is worth, and maybe more than it will be worth for years, even decades.

So what is a troubled homeowner to do?  Under a new and evolving government program, TARP (Troubled Asset Relief Program) funds are now available to lenders who accept reduced pay-offs on loans where the homeowner is upside down.  The problem has been that while TARP funds have been flagged for the program, and FHA has guidelines providing for the refi loans, there have not been actual lenders willing to make the refi loans to homeowners in the position of being currently upside down.

We have finally found a solution to the dilemma.  By entering into agreements with a select few FHA lenders where we provide additional guarantees, we have been able to originate refinance loans for upside down homeowners.

So instead of the homeowner getting a temporary payment modification, they end up with a NEW 30-year fixed rate loan in an amount that is a little less than the current market value of their home.  And they own the future equity growth in their home.  And there is little to no negative impact on their credit.  We also provide educational software that details the homeowner’s options and explains the steps, processes, and outcomes associated with each option.

We do all the packaging of the reduced pay-off proposal and we submit it to their lender.  Part of that packaging is the documentation of the homeowner’s financial situation, as well as documentation of the home’s current market value.  Plus we show that the homeowner is pre-approved for the refi loan.  Once the lender accepts the reduced pay-off proposal, we get a pay-off demand and provide the refi loan, and close the transaction in 30 to 45 days.  When all is done we also file for a property tax reduction with the local County Recorder’s Office.





Comments (6)

Elite Home Sales Team
Elite Home Sales Team OC - Corona del Mar, CA
A Tenacious and Skilled Real Estate Team

Thank you for the info. Can you do loans in southern Calif.  I have one that might work.

Dec 12, 2009 05:01 PM
Ralph Gorgoglione
Metro Life Homes - Palm Springs, CA
California and Hawaii Real Estate (310) 497-9407

Most loan mods are just another way for anyone but the homeowner to benefit from.

I have seen a few good ones, though where the homeowner gets a much better rate or even has got their principal reduced by quite a bit.

Dec 12, 2009 05:05 PM
Dan Tabit
Keller Williams Bellevue - Sammamish, WA

The ones I'm aware of have reduced rates for 5 years or more and some have even forgiven principle.  My major concern is lenders aren't doing enough of them.

Dec 12, 2009 06:00 PM
David Epperson
Mortgage Settlement Consultants - Walnut Creek, CA

Yes, I can do loans in Southern California.  Feel free to call me on my cell or pass my phone number and/or e-mail onto anyone you think may be upside down on their home.  Homeowners do NOT need to necessarily demonstrate traditional "hardship".  We are now seeing lenders finally recognizing that someone who owes $200K more than their home is worth, constitutes a hardship in itself.  There is a growing trend of homeowners with good credit, good income, and assets making a business decision to walk away from the negative equity.  They are weighing a few hundred thousand dollars compared to taking the hit on their credit.  Most will be able to buy again within three years, even with a foreclosure. I think we're going to see this trend grow as a huge number of Option ARM loans reset in the next few years.     

My cell is the best number for now.  Our IT department is reworking our phone system over the weekend.  Not sure if they'll have everyone set up correctly by Monday.  My cell is 925-708-8497.

By the way, if you have clients that you put into a home a few years ago, and they're now upside down, this is a great way to go back to them and be their hero.  One of the best ways I know of to get glowing referrals.


David Epperson



Dec 12, 2009 06:24 PM
David Epperson
Mortgage Settlement Consultants - Walnut Creek, CA

Yes, loan modifications are usually a 5-year plan with rates that ratchet back up to current rates by the 5th year.  I've seen some principle reductions, but only the the extent to hit a target monthly payment.  I've yet to see one that drops the principle balance down to current market value.  That's just not happening through the banks' modification departments right now.  

From comments we've heard from exec's at a couple of VERY large banks, they don't want to make public that level of principle reduction for fear of opening up the flood gates.  Most exec's realize it will happen eventually, but they don't want it to happen on "their watch".  But we do see things moving in a good direction.   

Dec 12, 2009 06:40 PM
Mike Young
203kOnLine.com, covering the USA - Stallings, NC
FHA 203k Consultant 916-758-1809

It is good to know there are options for these cases.

Aug 25, 2012 02:27 PM