January 10, 2009

Loan Modification: A Primer

Loan Modification: What is it

A Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.

Quite frequently they involve an interest rate reduction for a specified period of time so the homeowner can continue to make payments and stay in the home. Loans can also be modified so they have a longer amortization term, a 40 year instead of 30 year loan. Principal writedowns are rare, but they do indeed happen.

A simple Q&A on loan modification- What you need to know
(sourced from the HUD site)

Can the mortgagee include all fees and corporate advances?

Yes, when the lender looks to modifying your loan, they can include all fees and advances as part of the principal balance

May a mortgagee perform an interior inspection of the property?

Yes. The lender can do a home inspection to determine damages to the property which may impact the lenders decision.

Can a mortgagee include late charges in the Loan Modification?

No. Late charges should be waived at the time of the loan modification

Is there a new basis interest rate which mortgagees may assess when completing a Loan Modification?

Yes. The new basis interest rate is 200 points above the monthly average yield on the 10 year U.S. Treasury.

Are mortgagees required to perform an escrow analysis when completing a Loan Modification?

Yes. Mortgagors are required to ensure that the delinquent payments being capitalized reflect the actual escrow requirements required for those months capitalized.

According to a study done by the OCC, defaulting mortgages are re-defaulting at an alarming rate. After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller of the Office of Thrift..

The FDIC has a plan:

1. Housing payments for delinquent borrowers two months or more late would be reduced to 31% of gross monthly income.

2. Mortgage rates could be set as low as 3% for five years, before increasing at an annual rate of 1 percentage point until they hit the prevailing market rate.

3. Loan terms could be extended to as long as 40 years.

4.The government would share up to 50% of the losses if a borrower who had been helped ended up in default anyway. The risk of re-default would be shared with the lender.

Banks are not using the loan modification tools available and people who are desperate to stay in their homes are agreeing to loan mods they know they cant manage. Clearly, we need the Obama administration to require a mandatory loan modification program with enforceable guide lines that benefits main street and effectively keeps people in their homes.

Thanks for Reading

Howard Bell


A web site of over 450 articles related to real estate focused primarily on property management.

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