August 13, 2022

Is A Loan Modification Worth The Cost?

With the large number of people in arrears on their mortgages, various governmental agencies have been attempting to provide solutions.   Loan modifications have been proposed as the answer for over a year now.  The FDIC has recently been pushing this as the solution to keeping people in their homes and  spearheaded the effort to formalize and streamline the mortgage modification procedure.

From a practical standpoint of the person who is behind on their mortgage, the most important questions to ask, assuming that you want to remain a homeowners, are as follows:

  1. Do I qualify to have my mortgage modified?
  2. Will a loan modification help me in the long run?
  3. Should I pay someone to get a loan modification?

1.  As far as qualification goes,  a good place to start is by reviewing the new SMP guidelines – see Streamlined Modification Program – Who is Eligible? If a review of the guidelines leads you to believe that you qualify for a loan modification, a good way to start is by calling your loan servicer directly, whose phone number is on your monthly statement.

Be advised, however, that nothing is simple when it comes to a loan modification.  The process is controlled by different parties with different interests.   If your mortgage is not owned by Fannie Mae or Freddie Mac, the SMP guidelines that they issued may not apply to you.  A large percentage of mortgages originated over the last five years were sold on a worldwide basis to many different investors.  Generally speaking, the loan servicer that you are dealing with is operating under the guidelines of the investors who own your mortgage.  Some of these investors are willing to do a loan mod and some are not.  The terms of a loan mod that each investor allows will differ depending on their guidelines.

2. Whether or not a loan modification will help in the long run is a complex topic and will be the subject of another post.  Each loan situation is unique but if we examine the data from the Comptroller of the Currency, Office of Thrift Supervision, the results of a loan mod after 6 months showed re-default rates of 50 to 60%.

Three Months After Modification (30+ Days Delinquent)

Six Months After Modification (30+ Days Delinquent)

On-book portfolio (loans held by servicers)

35.06%

50.86%

FHLMC (Freddie Mac)

39.09%

57.87%

FNMA (Fannie Mae)

38.34%

57.11%

Private Investors

42.28%

60.76%

3.  Assuming that questions number 1. and 2. were answered with a “yes”,  a potential loan mod applicant should assess whether or not it makes sense to pay someone to do the loan modification for him.  The loan mod business seems to growing larger every day with a large number of companies offering to provide  loan mod services.   Some factors to consider when deciding whether or not to engage a loan mod company to help you include the following.

-How difficult will it be to get my mortgage modified?  The best way to get a preliminary assessment of this is to call your loan servicer, whose number is on your mortgage statement.  Depending on your situation and who owns your loan, it may be relatively simple to provide the servicer with the documents that they are requesting.  Many servicers and investors consider getting your loan current again to be in their best interests so they should be willing to help you out.

-If for whatever reason you do not want to deal with the loan servicer directly a call to a non profit organization such as Hope Now cannot hurt.  I have heard some people say that they have helped, some say that they are a waste of time; either way, a free phone call is an easy way to find out.

-Keep in mind that if you do engage the services of a loan mod company, they do not have any special powers of persuasion over the the investor owning your mortgage.   The loan servicer is going to make the same modified payment offer regardless of who they deal with.

-The price of a loan mod varies depending on what company you engage to help you.  I have seen prices ranging from $700 to $3500.  The amount of fees charged upfront also varies as do the service guarantees.  Some companies want the entire fee upfront and sometimes the entire fee is nonrefundable.

-If a loan mod company has expertise in the mortgage modification business they should be able to give you an accurate idea of what they can accomplish for you.  For example, there are some servicers (due to restrictions by the investor) who essentially refuse to modify a mortgage.  Regardless of who owns your mortgage, the loan mod company should be able to tell you give you a good idea of how your mortgage will be modified and what your new monthly payment will be.

-A principal reduction is done by very few servicers so if the company you are speaking to guarantees that they can do this for you,  be very skeptical.

-Do not work with any loan mod company without first checking their references.  There are few state or federal licensing requirements or proof of expertise required to enter this business so it is “buyer beware”.     Do not pay more than a modest nonrefundable application fee ($300 to $400 is common).  I would also not recommend engaging a loan mod company whose fee is nonrefundable.   You are paying for their expertise and they should know if they can help you before they take your money

-If your mortgage is delinquent by 90 days, which is usually required before a loan can be modified, do you really have up to $3,500 to spend getting your loan modified, when the odds of re-defaulting are up to 60%?

Conclusion:

There are reputable loan mod companies willing and able to get your loan modified for you and save you the time and hassle of paperwork and phone calls.   Considering the cost that most loan mod companies charge, your best bet is to directly contact your loan servicer or a nonprofit help agency first.

Streamlined Modification Program – Who Is Eligible?

On December 18, 2008 the Federal Housing Finance Agency, Fannie Mae, Freddie Mac and Hope announced their Streamline Modification Program (SMP) to assist troubled homeowners.  By implementing common standards and procedures for loan servicers to follow it is expected that the process will expedite the process of modifying a mortgage loan for a troubled homeowner.

Am I eligible for assistance under the new Streamlined Modification Program (SMP)?

If the answer to all of the following questions are YES, you may qualify for assistance under the new Streamlined Modification Program (SMP).

  1. Is your mortgage principal equal to or greater than 90% of your home’s market value?
  2. Is your home a single family residence or condo?
  3. Is the single family residence or condo your primary residence?
  4. Is your mortgage past due by 3 months or more?
  5. Is there a financial hardship that caused you to become late with your mortgage?
  6. Did you take out your mortgage before January 1, 2008?
  7. Can you verify your income?
  8. Is your current monthly mortgage payment (including taxes and insurance) greater than 38% of your gross monthly income?

If you answered yes to all of the above questions you probably qualify for assistance.  Even if you think you may not be qualified, you should still call your loan service provider, who will try to arrange an affordable monthly mortgage payment.  The Federal Housing Finance Agency states that “The key to success is the borrower’s ongoing cooperation and communication with the (loan) servicer”.

Other Considerations

The loan servicer’s phone number is usually listed on your mortgage statement.   In addition, the participating loan servicers in the SMP will attempt to contact delinquent borrowers by phone and mail.

A homeowner’s mortgage may be in foreclosure but the borrower may not be in an active bankruptcy.  A mortgage that was modified previously is eligible.   The new SMP covers mortgages owned by Fannie Mae and Freddie Mac.  Mortgages with the FHA, VA and RHS are not eligible under this program.

The loan service provider is authorized to lower your interest rate to as low as 3%.   A struggling homeowner has nothing to lose by directly contacting their service provider to determine eligibility.

Details Of Streamlined Mortgage Modification Released

The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac announced the details for streamlining the mortgage modification process for homeowners in default.  The new guidelines are an effort to standardize the eligibility requirements, thereby allowing the modification process to be completed more quickly.   Currently, the loan modification procedure is bogged down due to understaffed loss mitigation departments and varying rules which have turned the process into a two to four month ordeal for a homeowner already under financial stress.

Fannie Mae President Herb Allison stated that the new guidelines had been established by working with the Federal Housing Finance Agency (FHFA) and numerous lenders and service providers.  Mr Allison also noted that “These efforts are helping more than 10,000 delinquent borrowers every month get back on track”.

FHFA director Jim Lockhart noted that “I am pleased that our program is being rolled out right on schedule and that servicers are already working at modifying delinquent loans with the goal of keeping people in their homes”.

Loan Service Providers who administer the actual mortgage processing will attempt to notify eligible borrowers by mail of the details of the new Streamlined Modification Program (SMP).

The eligibility requirements for the SMP are as follows:

  • the borrower must own and occupy the home
  • the borrower is not eligible if he is presently in bankruptcy
  • the borrower must be delinquent at least three months
  • the borrower must have a loan to value of over 90%
  • the borrower’s income must be verified

The mortgage loan will be modified so that the borrower’s total monthly payment including escrows does not exceed 38% of his gross income.  To bring the ratio to 38% or lower, the term of the loan may be extended to 40 years and/or  part of the principal will be allowed an interest forbearance.   The interest rate on the modified loan may not be lower than 3%.  Any second mortgage on the property will be left outstanding.

There has been much controversy over whether or not the loan modification programs will ultimately work out well for the borrower since the loan principal is not being reduced.  As noted above, the servicer can make the borrower’s payment smaller by making a part of the principal interest free for a period of time (principal forbearance).   The homeowner, however, will in many cases still owe more on his home than it is worth and the reduced mortgage payment usually only lasts for 5 years.  It is therefore interesting to note that the new streamlined modification program does not allow for any type of principal forgiveness.

The loan modification process has generated a lot of controversy and criticism lately since the redefault rate was approximately 50% after 3 to 6 months.   Each party involved in the process has different interests to protect and were promoting different eligibility standards.   It will be very interesting to see if this new streamlined and standardized loan modification program will result in a smaller redefault rate going forward.