LOAN MODIFICATION

A short time ago (see Reflexion Time) I advised those who could not sell their homes and may face some difficulties due to refinancing woes to consider loan modification. Now comes the news that Countrywide, the nation's number one lender is going to modify 16bn. worth of mortgages! This is clearly an indication that things are not getting better in the mortgage sector.
What is a loan modification?
I will use an actual case: a client of mine who through another lender took a 2-year ARM in 2005 at 7.625% saw his rate go up to 10.5% this year after his mortgage reset. His new payment jumped to $3,100 from $2,300 including taxes and insurance escrows. He did not go into foreclosure but the going got really tough.
His lender offered modification consisting of a 2-year fixed term at 5% and the balance of 28 years at 7.5% also fixed. This program is known as a temporary buy down. It differs from a standard ARM because its terms are known and set at the beginning, there are no subsequent adjustments.
Here is the rest of this story: the lender wanted this borrower to fork $1,900 right away and pay his new mortgage of $2,100 by the 1st of November! For the average struggling borrower who has spent over $9,000 in the last three months to come up with another $4,000 an one month can be challenging to say the least.
This story ends with me refinancing the borrower at 6.5%, 30-year fixed in less than two weeks.
Why modify a loan?
In the case of Countrywide and other lenders, modifying a loan is a way of minimizing losses: they keep the loan, continue to collect payments and this becomes a good PR move. (Concerned corporate citizen)
The borrower gets to keep his property and monthly payments are reduced. As always the terms of the modification must be scrutinized and understood.
When to seek modification?
The best time to approach your lender for a modification is BEFORE you get in trouble with your payments. Loan modifications are not granted automatically, the borrower must still qualify for the new payment, i.e. the lender reviews the income to determine the new payment.

In conclusion, loan modifications are a win-win situation for the borrower and the lender but the lender's motivation is primarily to preserve his assets. By lowering the interest rate for the modified loan, the lender stands to make less money for his shareholders but this is less costly to him than foreclosing.
Countrywide has been in the news recently with announces of job cuts, possible investigations for stock trades by its officers, this action could also be designed to draw the attention away from bad publicity, who knows?

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