Loan Modifications

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

I thought I would talk about loan modifications this week and share some insight with all of the professionals out there that have embarked on this relatively new aspect of the mortgage industry. As we are all aware there are several borrowers out there who no longer qualify for a refinance due to decreasing property values and in some cases unacceptable credit. Tightening of mortgage credit guidelines have very little to help these individuals, qualifying for mortgage money is harder then ever.

It seems that for some individuals, loan modification could be the answer and several loan servicers seem to be welcoming the idea now more then in the past. Loan modification is basically the modification of one or more features of a mortgage note. These features could include interest rate reduction, principal reduction or even possibly lengthening the term of the borrower’s current mortgage. Any modification must of course be agreed upon by the borrower and the loan servicer and should ultimately improve the borrowers overall financial position.

In some cases modifications can be more financially feasible than refinancing as the borrower does not incur the settlement costs that would normally be associated with a refinance transaction and in the case of a borrower who is credit challenged, it might be the only available solution. There are costs associated with a loan modification however, these usually being the fees charged by modification specialist or attorneys who are negating the loan modification on the borrower’s behalf and these charges can range from $800.00 to $2500.00 depending on if an attorney is involved.

The modification process can be somewhat involved for the borrower and loan modification specialist depending on what documentation the loan servicer requires. This information must be collected from the borrower and provided to the loan servicer to determine that the borrower will qualify for the modification in the sense that they will be able to continue to perform under the note once the agreed upon modification terms take effect. This involved calculating HTI and DTI ratio’s for the modification specialist as well as determining what interest rate and principal balance will result in a payment acceptable to achieve these ratio’s.

In addition, the borrower must provide income and expense worksheets to determine all of the borrowers hard and soft expenses in order to demonstrate to the loan servicer that under the modification plan, the borrower should reasonably be able to afford the new modified monthly mortgage payment as well as other real life expenses.

The modification specialist must also complete the modification proposal on behalf of the borrower which should include all requested changes to the terms of the borrowers current mortgage and demonstrate the borrowers overall financial picture once the modification is effective. This also requires documentation from the borrower which must be analyzed and put in some sort of comprehensive order for the loan servicer.

Often times additional documentation such as appraisals or forensic loan audits will provide additional support, particularly if the modification specialist is trying to demonstrate that the borrowers rights were violated under RESPA or TILA when their original mortgage was received or if they want to demonstrate that based on the subjects property current value, that foreclosure will result in significant losses to the loan servicer.

Modifications can be a very effective tool for a borrower who has no option where a refinance transaction is concerned and may often be the only means for a borrower to covert their current mortgage into a fixed rate mortgage with a reasonable interest rate. Some qualifying is required and documentation requirements exist however is handled correctly could offer successful results for borrowers who have no other option. So for those loan officers out there who are looking to expand revenue options, this option might be something to think about.

NAMP offers a 3-hour live, instructor-led webinar entitled: LOAN MODIFICATION 101 in which you'll learn everything from A to Z.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)