What is a Loan Modification?

Loan modifications have been, for the most part, the long waited rescue plan for some homeowners who have fallen behind on their payments. Nonetheless, this is not the silver bullet for the foreclosure problems we are going through right now.

Contrary to what the so called “loan modification experts” may say, not everyone qualifies and not every lender is cooperating.

THE BASICS

To understand what a loan modification is, we need to first learn the basics of what a loan is. A loan, simply put, is a contractual agreement between two parties. The contract spells out the duties as well as the rights of each party and the terms of the contract.

In a mortgage loan, the terms of the contract spell out when and how much the borrower shall pay the lender in order to keep the loan in good standing. The lender’s recourse, if the borrower defaulted on the loan, is also specified. Lastly, the interest rate and how it will be applied to the loan will be included in these terms as well.

In certain circumstances, the terms of a loan contract can be changed, hence the loan modification. However, before the terms of the contract are modified, both parties have to agree to such changes.

One party cannot change the terms of the contract without the consent of the other. Therefore, if a borrower is not satisfied with the terms of the loan modification, the borrower does not have to agree to them. In the same manner, if a lender is not satisfied with the new terms, the lender is not obligated to change them.

If both parties agree to modify the contract, a waiver of breach of contract occurs which is ok as long as both parties have agreed to it.

IT IS NOT EASY

The results of a modification vary. The lender could agree to reduce the loan amount, reduce the interest rate, change the amortization terms of the loan, or a combination of these options.

Many times, however, loan modifications are unsuccessful. Some of the reasons are the lender’s unwillingness to cooperate, the inexperience of lender negotiators, the lack of manpower to process these requests, the broken communication between the company servicing the loans and the actual investor who holds the note, outrageous requests by the lender, etc, etc.

So, what does it take to modify a loan?

Let me tell you from experience that it takes time, lots and lots of patience, strong will, persistence, strong negotiating, record keeping, good information, facts, many phone calls and faxes………etc, etc.

THE REQUIREMENTS

Borrowers normally do not need to be late with their mortgage payments; however, lenders have shown to be more attentive to borrowers who are late. This does not mean borrowers should voluntarily get behind on their payments, this simply means that the process can be a little more tedious and complicated if the borrower is current with their payments.

One of the first and most important factors that lenders will look into is the financial situation of the borrower. They will do this by requesting a financial statement (you may download this PDF form and use it to prepare your financial statement). Based on the financial statement, the borrower should establish a reasonable monthly payment amount.

By looking at the details of the financial statement, lenders are able to use their preset “debt to income ratio” to qualify a borrower for the modification. A debt to income ration is simply the ratio of total monthly expenses as a percentage of the total monthly income.

Lenders will also take into consideration the hardship a borrower is experiencing. Some of the most acceptable hardships are:

Divorce
Death of the primary wage earner or borrower
Unemployment
Partial loss of income due to reduced hours
Serious illness or permanent disability
Decline in business proceeds or failure of a business

However these are not written in stone. Lenders will review each situation on a case by case basis.

For the hardship to be considered, the lender will require a hardship letter. If you Google “Hardship letter sample,” thousands of samples will come up. Most of these are generic and are essentially written in an indirect writing pattern.

They begin with a “buffer”, followed with a message that conveys empathy, presents several reasons and closes with a positive message and a firm request.

The “buffer” explains the circumstances that caused the hardship. The letter should explain the steps that have been taken or will be taken in order to get back on track. Following the explanation for the hardship is the request for the modification. Here the request has to be convincing and reassuring for the lender. It has to present a strong argument why it is financially beneficial for the lender to modify the loan.

An effective hardship letter will bring tears to the eyes of the person reading it; however, this does not mean the letter should include lies. The letter should be kept short, preferably down to one page.

Other documents that will be required by most lenders are:

Mortgage statements
Pay stubs
Income tax returns with W2’s
Bank statements
Medical bills
Written employment notification of reduced hours or layoff
Appraisal (the lender may ask the borrower to pay for it)

Again, these are not written in stone. Lender’s request may vary on a case by case basis.

The next step after gathering the documents and analyzing the situation is contacting the loss mitigation department by calling the lender directly. Beware that most departments within the same lender do not talk to each other; therefore, good record keeping of the people, departments, and conversations is essential. After contacting the loss mitigation department and presenting them with a complete package for the modification, the lender should be able to freeze the loan so that the borrower is not accruing additional late fees.

As I mentioned at the beginning of this post, everyone does not qualify for a modification and not every lender will cooperate. If a lender denies the first proposal to modify the loan, it should provide an explanation for the denial. Furthermore, there is nothing that prevents a borrower from coming back with a different proposal. Always making a point to show the lender that it would be financially beneficial to proceed with the loan modification rather than foreclosing. However, in certain circumstances like quitting a job for unnecessary reasons or normal seasonal layoffs, the lender may not even consider doing it.

If requesting a loan modification becomes a daunting task, perhaps seeking the help of non-profit organizations or experienced loan modification companies may be the way to go. Nevertheless, every homeowner should be aware that there are many untrustworthy and illegal loan modification companies out there. On the next post I will discuss how in California, Florida, Maryland and other states it is illegal to charge upfront fees for a loan modification.

Comments

22 Responses to “What is a Loan Modification?”

beachdude on November 28th, 2008 7:41 PM

Loan modification mortgage is a process whereby a home owner’s mortgage is modified and both the lender and homeowner are bound by the new terms of the new mortgage. The most common loan modifications are listed below:

lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above
Buying a Short Sale or Pre-Foreclosure Property : San Jose-Santa Clara County Real Estate UNCENSORED on December 4th, 2008 9:13 AM

[...] this happens the lender will begin calling the homeowner offering to assist them either through a loan modification, forbearance agreement, etc. If the homeowner does not qualify for any of these programs or ignores the calls (this is a big [...]
Loan Modification, Foreclosure Prevention and HUD Counseling Event in San Jose : San Jose-Santa Clara County Real Estate UNCENSORED on December 4th, 2008 9:16 AM

[...] borrowers will be able to work directly with their lenders to modify their loans and/or receive counseling from HUD certified [...]
Loan Modification and Foreclosure Help at San Jose Community Event : San Jose-Santa Clara County Real Estate UNCENSORED on December 4th, 2008 9:19 AM

[...] are directed to your participating lender, you will have the opportunity to meet face to face and negotiate a loan modification on the spot. The caveat here is that you have to come prepared and bring all the required documents [...]
US Financial Crisis: Whose Fault Is It Anyways? : San Jose-Santa Clara County Real Estate UNCENSORED on December 4th, 2008 9:37 AM

[...] If you are a struggling homeowner, contact your lender and review your options. Educate yourself and don’t fall victim to foreclosure rescue schemes or loan modification schemes. [...]
Paul J. Molinaro, Esq. on December 7th, 2008 11:38 AM

In California, the DRE website lists the companies that have DRE “permission” to modify loans… add to this list any California attorney, and that is where you should seek help (in California). My law firm has been getting more and more calls recently from homeowners that were victims of predatory lenders and now fell into the hands of those same people who sold the toxic loans but profess to be saviors… don’t be a victim twice… do your homework and THOROUGHLY investigate any comany law firm or otherwise before hiring them to save your biggest asset and your home. And, yes, my firm does take cases against loan modification comanies who have violated laws. These scammers are popping up everywhere on the Internet, billboards, and media advertisements everywhere. Make no mistake, in many cases, these are the exact same loan officers and mortgage brokers who fleeced homeowners the first time… they have now found a new way to make huge profits. Of coure, this is one lawyer’s biased opinion, but one based on many distressing calls to my office every day.
- Paul J. Molinaro, Esq.
Ney on December 16th, 2008 9:16 PM

Everyone should be aware that just as there are bad real estate/mortgage brokers/agents, there are also bad attorneys, politicians, judges, police officers, etc.

So, no consumer should believe a broker simply because he/she claims to be a loan modification expert. In the same way no consumer should believe an attorney simply because he/she claims to be a loan modification expert.

As stated above, do your homework and thoroughly investigate the company or law firm you will be contacting for a loan modification.
Shah Peerally on January 11th, 2009 6:17 PM

It is imperative that your loan modification is done by a law firm. Note that DRE approved loan mod companies cannot take your case with advanced fees on NOD cases. Your best bet is to stick to a lawyer. Real Estate brokers have pretty much abused people and the entire economy. Trusting them to help you now is like asking a child molester to look after your child. So beware.
Our office assists many with their loan modification.
Feel free to check our website [SITE NAME EDITED].com

Good Luck
Shah Peerally
ATtorney at Law
Ney on January 12th, 2009 10:30 AM

Shah Peerally,

Your statement, “It is imperative that your loan modification is done by a law firm,” is an overstatement to say the least.

While it is true that no individual or company may ask for advance fees before or after an NOD is filed, attorneys are exempt from this rule. However, I would have to question a situation where a client pays an upfront fee to an attorney and later the lender denies the loan modification request.

What happens then? Will the attorney return the fees back to the client? Will the attorney return most of the fee paid back to the client? Those are questions that everyone needs to ask since the fee is being paid upfront.

You claim that real estate brokers have pretty much abused people and the entire economy. How about attorneys? They have not done their share of abuse to homeowners? Are attorneys the solution to financially strapped homeowners? No they are not!

I know there are good, honest attorneys. I know because I’ve come across some of them. However, it would be irresponsible and immature for me to say that any or all attorneys should be trusted with loan modifications. In the same manner that it would be if I said that any or all real estate/mortgage brokers should be trusted with loan modifications.

You say that trusting real estate brokers is like asking a child molester to look after your own child. That is a pretty strong accusation?

How about attorneys?
How about attorney Anthony G. Young who was disbarred after pleading guilty to conspiracy to commit mortgage fraud?
How about attorney Mary Reagan who was sentenced to serve almost 5 years in federal prison for her role in a multi-million dollar mortgage fraud scheme using straw buyers?
How about attorney Marc Dreier who was arrested on charges stemming from a $100 million fraud against various hedge funds?
How about attorney Joseph J. Weisenfeld who was sentenced after his guilty plea to wire fraud charges?
How about attorney Michael P. Rumore who pleaded guilty to stealing approximately $4 million entrusted to him for real estate closings?

Anyone that makes bold claims like “only attorneys should be trusted for loan modifications” or “only brokers should be trusted for loan modifications,” is living in a make believe world.

Take a look at this other case for example. Pastor Harold Joe Hicks was indicted for stealing tens of thousands of dollars through a mortgage fraud scheme.

The trust should never be based only on someone’s professional title or achievements; it should be based on that individual’s ethical standards as well.

Finally, my point to you Shah is that perhaps you should be a little more responsible with your statements. You will be shocked when you learn that just like there are good attorneys, brokers, police officer, judges, school teachers, priest, etc; there are also bad apples in each and every single professional field that ruin it for the rest.
Louie Frias on January 19th, 2009 11:27 AM

Homeowners should ask themselves if an attorney is actually working on their case and since its illegal for any attorney to guarantee the outcome of any case, how is it that everyone throws the word guarantee around? (Most likely NOT being said by attorneys, rather those who haven’t a clue of what they’re doing.) More likely they’re NOT involved with an attorney and they use that word to falsely assure the homeowner that their hard earned money will be returned. TIP: Attorneys do not have “money back guarantees.”

Why not deal with experienced professionals from the very start? An expert will know if the consumer even has a shot at success. Experienced mortgage bankers with underwriting backgrounds are the only way upfront, that you can ever know if your loan will be approved…the same if true for loan modification. Don’t just believe that some intake interviewer will know this. All that persons job is is to gather data, your check and turn your file in to someone who is supposed to be able to determine your chances…the person you initially speak with should be highly qualified to do this and not raise your hope or delay your answer.

[LINK EDITED] FederalHomeLoanMods.com
Ney on January 20th, 2009 1:41 PM

Louie Frias,

On your website you state as a disclaimer the following: “The founders of FHLM are real estate licensees and not attorneys.” However, you also state “our attorneys focus on removing any past due balances and late charges etc. at the time of the loan modification.”

Based on this information found on your site, would it be correct to say that you, Louie Frias of First Federal Realty, and Robert Wilmer of TerraSpec Holdings, are two real estate agents in the state of Nevada who has teamed up with an attorney to do the loan modifications?

If so, who receives the $3,500 fee you company charges? Is it you, your partner, or the attorney you guys work with? Or do you guys split that fee between all of you?

In the state of Nevada, Commissioner Joe Waltuch warns that there are laws prohibiting fees being charged up front for foreclosure assistance. According to NRS 645F.400, foreclosure consultants cannot charge a fee before they have performed the services promised at the point of contact.

According to NRS 598.741, companies providing “counseling or assistance” to a person for a loan modification should be registered with Consumer Affairs in the State of Nevada. If FHLM is actually a company, is it registered?
Understanding Obama's Making Home Affordable MODIFICATION plan : SCC Real Estate UNCENSORED on March 9th, 2009 11:51 AM

[...] however, it will serve homeowners as an incentive for loan servicers/lenders to generate loan modifications. Nevertheless, financial institutions that accept future “bail out” funding from the [...]
Donna Ferreira on February 26th, 2010 1:19 PM

A very useful negotiating tool for borrowers and attorneys to use in the loan modification process is a forensic loan audit done by a NAMU certified loan auditor. A good manual loan audit can find any violations of RESPA, TILA, HOEPA, Predatory Lending Practices, the California Financial Code and the California Civil Code. Violations are out there, that can be found and they can be used to negotiate for the borrower. One of the biggest cover-ups appears to be Option ARM loans, also known as Negative Amortization loans. If those loans were not written properly, they may violate the California Civil Code CIV Section 1916(7)(b). Don’t rule out the use of this valuable tool in helping your clients.
Ney on March 1st, 2010 7:40 AM

Donna,

Any certification held by a forensic loan auditor, regardless of the nature, has no real or significant guarantee in the process of a loan modification.

The loan modification industry and the forensic loan audit industry are both unregulated industries. There are no local, state, or federal agencies that regulate these industries resulting in loan-modification consultants trying to cash in on the desperation of homeowners facing foreclosure.

The truth is that there is no evidence or statistical data to support claims that forensic loan audits-even if performed by a licensed, legitimate and trained auditor, mortgage professional or lawyer-will help homeowners obtain loan modifications or provide any other foreclosure relief.

So, should you trust a forensic loan auditor, regardless of the certification held? The answer is a resounding NO!
Donna Ferreira on March 1st, 2010 1:36 PM

I disagree. A forensic loan audit in the hands of an attorney who is negotiating a loan modification is a powerful tool for the borrower.

Its a negotiating tool, that is all it is. It is not a guarantee of anything.

If an attorney was helping me with my negotiations, I would definitely want a forensic loan audit that documented all the lending violations of my loan.

I would want as much leverage as I could get.

Donna
Geo on March 1st, 2010 8:44 PM

Wow, someone has never seen a real Manual Forensic Loan Audit. It’s more extensive than a “manually underwritten” loan file.

Mainly because it is done from a compliance point of view. Ie: What violations (there are plenty or we wouldn’t be in the mess we are in) in RESPA, TILA, HOEPA, Predatory lending, fraud…were committed?

Main point here is: if you were a borrower who was taken advantage of by a Lender, then there will be a lot of evidence in the loan file. That evidence, in the hands of a “good attorney” is very valuable, “if” it is pulled out of the file, explained accurately, against the law that was violated.

Basically, is it a “professional” investigation? If so, it will make the case or loan Mod. If not – piece of junk.

Was the audit done by a “real auditor” or just a clerk who fills in the blanks of a pre-scripted computer program? Did the auditor read all the documents? Do they understand the documents? Are there narrative comments written specifically for each law violated for “that” loan or are they computer generated generic statements…?

See? There is a difference between these two types of “audits.” One type is worthless, the other is a full blown investigation.

Regarding “no guarantee.” Here is my comment. There is no guarantee that anyone will get justice in our courts (or life), 100% of the time. Many times it’s like rolling the dice.

If your looking for guarantees you’re on the wrong planet. You could have the best case possible for a loan rescission or Mod and still not get it approved because you are dealing with imperfect people. Maybe the “decision maker” for your Mod is having a bad day and turns it down or they are new and don’t want to make a mistake so they turn down everyone. Or your Judge plays golf with the bank president and always denies rescission on “that” bank’s cases…

Go try and get a guarantee from the realtor who told you that your property will go up in value “cause they always do.” or your 401k “fund manager” who kept telling you “to stay in the market” while you lost 45% in your mutual funds last year…So please don’t talk about guarantees unless you guarantee the outcome of everything you do, Neh.

All the crooks that moved into the mortgage business when it was easy money moved into loan mods (and other businesses) when that free ride ended. Now they’re selling “forensic loan audits” to get upfront money for their loan mods and making a bad name for the few honest loan investigators around.

Everything is not always black and white, Neh. If it were, then only a blind man would not see the difference. In fact most things are gray which is why people get taken advantage of. They can’t tell how gray, so to speak.

By the way, the loan mod “industry” is regulated by the DRE and the BAR. Both organizations heavily monitor Modification activity and investigate complaints. They also suspend or revoke licenses for ethics violations and violations in the law. Look on the BAR website and you’ll see who is on their watch list and who has been suspended, etc. regarding loan mods.

When you deal with professionals and know they are by their references, when you ask a lot of questions and pay attention to the answers and how they are answered. Then you’ll know or at least have a good idea of who you are dealing with. That’s the closest thing to a Guarantee you’ll ever get.
Ney on March 2nd, 2010 7:35 AM

Donna,

Again, as stated by the Office of the Attorney General Edmund G. Brown Jr, there is no evidence or statistical data to support claims that forensic loan audits will help homeowners obtain loan modifications or provide any other foreclosure relief, even if performed by a licensed, legitimate and trained auditor, mortgage professional or lawyer.

Regardless of how effective you may think these audits are, the point here is that although a forensic loan audit may work in very few cases most forensic loan audit companies, forensic loan attorneys, etc; charge money upfront and this is illegal.

Are you a forensic loan auditor besides being a real estate agent? If you are, perhaps that is the reason why you are so bias.
Ney on March 2nd, 2010 7:50 AM

Geo,

I am not saying that forensic loan audits “will not” work. I am saying that, and the office of the Attorney General concurs, forensic loan audits are boasted as the best choice for a homeowner facing foreclosure.

I do agree with you that there are no guarantees in life; I don’t think I made any guarantees on my comments. However, forensic loan audits are offers with guarantees or implied guarantees. If you read the message I left for Donna you will see the real effectiveness of a forensic loan audit.

The point is that forensic loan companies, forensic loan attorneys, etc are charging money upfront for these services and in most cases, the homeowner ends up loosing the home and the money they paid.

There would be no problem or discussion if these forensic loan auditors collected their fees after the loan modification has been successfully completed, as required by law.

I do agree that everything is not black and white, that is why my comments are against charging money up-front for any services offered to delay or stop foreclosure.

You are incorrect, nevertheless, in your statement that the loan modification industry is regulated by the DRE and the BAR; so I will explain to you how this works.

The DRE oversees real estate agents. Prior to SB 94, the DRE had restrictions for real estate brokers regarding charging money up-front for foreclosure relief services (eg: loan modifications, forensic loan audits, etc). After SB 94 passed, California legislature made it illegal to charge up-front for any foreclosure relief services. The DRE does not oversee loan modification companies or forensic loan auditors.

The BAR oversees attorneys. The BAR works towards making sure attorneys perform their professional obligations and meet all ethical standards. Prior to SB 94, there were no restrictions put on attorneys for charging money up front for loan modifications since the nature of their business is to charge money up front. After SB 94 passed, California legislature also made illegal for attorneys to charge money up front for any foreclosure relief services. The BAR does not oversee the loan modification industry or the forensic loan audit industry.

The DRE can only rule over real estate licensees and the BAR can only rule over member attorneys. As you may know, however, foreclosure relief services are offered by individuals from different professions.

I do agree with your last statement about dealing with a true professional. However, it is also a good idea to get answers from more than just one source.
Donna Ferreira on March 2nd, 2010 12:46 PM

Hi Ney,

Nope, I am not a Forensic Loan Auditor at all, and I have never done a loan modification either. But I did have a chance to see 2 MANUAL forensic loan audits recently and was impressed by the documentation and thoroughness of these reports, one as long as 23 pages, the other one longer. Every violation that was noted included the exact law, regulation or Act that was violated. The terms of the loan and the activities involved in processing the loan which were not in violation of any rules and regulations
were also noted as not being in violation. As I mentioned above, it was a very thorough audit. It would be up to the attorney, loan mod company or borrower to then use the audit as a negotiating tool.

It is only illegal to get an upfront fee for this if the homeowner has received a NOD (Notice of Default) or is in foreclosure. The 2 MANUAL forensic loan audits that I had a chance to look at were done for borrowers that were not in foreclosure. Those borrowers just wanted to get the rate and/or terms of their loans modified. And I don’t know if an upfront fee was paid for them or not. As I said, I don’t do loan audits or loan mods. I did not see any billing statements.

Just because someone can’t charge an upfront fee for a forensic loan audit for someone in foreclosure does not mean that one can’t be done. A manual forensic loan audit could still be done to find lending violations as part of the loan modification process where the borrower pays ONLY if the loan mod is successful. It just means you can’t charge for one upfront.

The process of a manual forensic loan audit is not a bad thing, just like a loan modification is not a bad thing.

Both of these can be helpful to the borrower.

You seem to be saying that all loan audits are bad because some people charge for them upfront. That doesn’t make the loan audit bad, it makes the person bad for charging an upfront fee if the borrower has received an NOD or is on foreclosure.

Borrowers need to research who they choose to help them with loan mods. The CA Dept of Real Estate has pages and pages of companies and individuals who have applied to the Dept for approval. And, borrowers should know about their options. One of their options is a manual forensic loan audit which MAY be a helpful negotiating tool IF lending violatins are found.

Loan audits like loan modifications if done legally, honestly and ethically can help the borrower. That’s the bottom line; helping the borrower using legal and defined processes.
Ney on March 4th, 2010 7:47 AM

Donna,

I thought the reply I left for Geo was clear enough but apparently my message was not clear enough. Read it so you can understand it.

Yet again, I am not saying that forensic loan audits “will not” work. I am saying that forensic loan audits are overrated simply because most auditors charge up-front fees and boast about the audits successful results.

Additionally, a forensic loan audit report with 23 pages could be just as detailed as a 10 page report. I could do a complete market analysis for a prospective client that uses 23 pages and I could do a more detailed analysis using 10 pages.

The point here is not about how many pages are use on the report, the point here is about its effectiveness and the fee collection practices of this industry.

Also, as I already stated to you on my previous response, the Office of the Attorney General said that there is no evidence or statistical data to support claims that forensic loan audits-even if performed by a licensed, legitimate and trained auditor, mortgage professional or lawyer-will help homeowners obtain loan modifications or provide any other foreclosure relief. However, forensic loan auditors seem to boast about the contrary.

It appears that you are also not aware of the new law affecting all foreclosure relief services. So I will briefly explain them to you so that you can understand it.

Prior to SB 94, the California Civil Code Section 2945 did allow up-front fees as long as the NOD had not been recorded. After the NOD was recorded no up-front fees were allowed.

After SB 94 passed as law, collecting any type of up-front fee in exchange for any foreclosure relief service is illegal regardless whether the NOD had been recorded or not.

Additionally, those brokers who received the “no objection” letter from the DRE and are listed on the DRE’s website can only charge an up-front fee for contracts made before Oct 11th, 2009.

I understand that you don’t do forensic loan audits or loan modifications but your comments beg the question (no personal attack, just a question), are you referring your clients to a forensic loan audit company, or to an attorney? If so, is the attorney paying you for each referral? (Highly unethical)

If you are, you should also know that a referral relationships between lawyers and non-lawyers are allowed by the California State Bar as long as there is no money involved.

I hope that the links I have left you in this message can help you be better informed about what is legal and illegal.
Donna Ferreira on March 4th, 2010 12:03 PM

Ney, Thanks for all the data! No, I am not referring any clients to anyone at this time. I don’t refer to Loan Mod companies, but when someone asks me to help them with a loan mod, I do tell them to find an Attorney who specializes in Real Estate and has had good success with loan mods. I don’t know any since I have not researched them.
Ney on March 4th, 2010 12:40 PM

@Donna No problem…hope that info was helpful