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Never pay up front for a loan modification

Wednesday, May 1, 2013 - Article by: Lender411 Member

Never Pay an upfront fee to do a loan modification in Ca.

There is no incentive for any agency that charges an upfront fee to complete your loan modification.

The final results is always based on your gross income and is usually fairly predictable. They may just drag out the process to justify the upfront fees that were being charged. First Choice Solutions has created the "Know Your Options Campaign" to help homeowners navigate through the Loss Mitigation process. Our "360 Approach" has help hundreds of clients understand the process.


The most challenging issue confronting upside-down property owners is whether their lender will do principal reduction as a part of a loan modification. This Article is to give you 1) an overview of what to expect in a loan modification; and 2) identify the current status of efforts to get lenders to do principal reduction as part of a loan modification.

- Since the recession started in 2007, many government and private programs have come into being to push lenders to "modify" the loan contracts to make them more affordable and enable borrowers to keep their homes. The best known of these programs is the Home Affordable Modification Program, commonly called HAMP, which deals with conventional loans typically owned by FNMA and Freddie Mac (HAMP has expanded to most Lenders/investors). Many other "proprietary" modification programs exist with lenders to deal with non-HAMP loans. Virtually all of them are based upon qualifying criteria that a borrower's first loan payment should not be more than 31% of their gross monthly income. HAMP tier 2 (25%-42% Front end DTI) If you qualify, then the following modification options may be offered to you:

1st: Interest Rate Reduction - will reducing your loan's interest rate (2%) reduce your monthly payment to 31%? If so, this may be all you are offered. This is the most common modification.

2nd: Lengthen the Loan Term
- will reducing interest plus also extending the term from a 30 year payback to 40 years reduce your monthly payment to 31%? If so, these two may be all you are offered.

3rd: Forbearance - the lender may offer to take a portion of your loan balance and move it to a "silent second" position. Now you only make payments on the remaining first loan. The second sits there, doesn't accrue interest and doesn't require monthly payment. But it never goes away. If you later want to sell or refinance the property, this second loan must also be paid in full. This option is less common but does occur, particularly with Bank of America modifications.

4th: Principal Reduction
- the last option for modification and the least desirable option for lenders is Principal Reduction where they actually forgive, ie: extinguish, a portion of the principal balance. Unlike forbearance, with Principal Reduction the forgiven amount never is repaid, it's is gone.

- Principal Reduction asks lenders (and their investors) to lose money they loaned so that an upside-down borrower can keep their home. Understandably, lenders' response to such requests has been: "why should we lose, we didn't breach the contract?" While many may disagree that lenders have no responsibility for the loss of property value, by and large the Federal and State governments have been unwilling to pass any law compelling lenders to do principal reduction. Arguably, governments have no legal right to do so even if they had the political will. So generally, principal reduction has been a "last-resort" option that is rarely offered.

Principal reduction will only be granted as a final solution to get your front end
debt to income ratio to 31% and pass the NPV test. Best case is usually 125% loan to value.

Principal reduction will not be used just to get your loan balance closer to the actual property value.

Currently if your loan is owned by Fannie or Freddie there is NOT a Principal Reduction program in place.

New Fannie & Freddie Streamline program:

The Federal Housing Finance Agency will require mortgage servicers to offer a streamlined modification program to borrowers with loans owned or guaranteed by Fannie Mae and Freddie Mac, starting in July. The offers will be sent to homeowners who are at least 90 days behind on their loans but no more than two years behind. To qualify, borrowers must owe at least 80 percent of the home's value.
The modification reduces the loan's interest rate and extends the loan term to 40 years.
Minimal paperwork: Borrowers won't be required to submit any financial documentation to the lender to get approval. The loan modification becomes permanent after three payments are made during the three-month trial period.

What is the NPV (Net Present Value) test?

Loan Modification NPV Calculation: This approval trigger tells the lender which option is most cost effective for them-modifying the loan or taking the home back in a foreclosure proceeding. Net Present Value uses certain values in the calculation-such as:

Current Market Value of property as opposed to current loan balance
Homeowners financial situation-monthly income, monthly expenses and current bank balances
Borrowers credit score. Ability to modify the current loan using the Waterfall Method of Modification - lower interest rate, lengthen loan term, lower principal balance

You either PASS or FAIL the NPV test
Debt to Income Calculations:
Your current DTI must exceed 31% or you will be turned down in most cases
*NOTE: The Tier 2 HAMP program gas changed the DTI Ratio to a range of 25%-42%
Housing expense equals the total of: mortgage payment, monthly property taxes, insurance and any HOA dues. Total housing expense divided by gross income equals your DTI

I can run your potential Loan Modification through the HAMP calculator to determine your eligibility for either the Tier1 or Tier 2 program offered by HAMP ( I can even show you how to run the report). This will determine what your payments will look like. You can even present these findings to your lender.

* NOTE: if you have second lien? We should have a conversation on how to handle the second. Loan Modifications are based on your first lien unless both liens are owned by the same investor.
Brian McFedries
First Choice Solutions

*Call 1-888-995-HOPE (4673) to connect with a HUD-approved housing counseling agency. The housing counselors at this hotline will be able to speak with you regarding all of your options.

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