Modifications 101

Several people wrote to ask good, basic questions about loan modifications after my last blog post and in response to the Denver Post's front-page article quoting me Saturday ("When Renegotiating Debt It Pays to Look Poorer"). I thought it might be useful to give a simple explanation. This isn't for the mortgage experts among us. It's for the consumer or borrower who is trying to navigate through the often-difficult mortgage loan default, collections and foreclosure process.

First, I want to be clear that I'm not an adviser to borrowers or other individuals. I run a business whose customers are large institutions and major private investors. We deal with thousands of loans at a time. We never talk to borrowers about their loans, and we never take on responsibility for a loan or a loan workout. We can't help you with your loan, and even discussing your individual circumstances would violate our own corporate policies.

If you need help with your loan, call your servicer. It might be a painful process, because servicers are overwhelmed with people seeking assistance, but that's your best source of advice and nearly the only place you can go where someone can take action on your mortgage. One large, national servicer we work with has processed 138,000 modifications in the past couple of months and has 155,000 applications pending review. And they have only 900 employees to do this and all of their other collections work! So patience and persistence are vital.

A modification is simply a change to your mortgage. It's usually a change that lowers your payment, so you can afford to pay your mortgage. There are three ways main ways to do this:

1.        Reduce your interest rate. This is common, especially if you have a high-interest-rate loan or an adjustable-rate loan whose rate has increased during this difficult economic time.

2.       Extend the years you have to repay your loan, by moving the due date out. This spreads the repayment over more time, reducing the amount you pay each month.

3.       Reduce the principal balance, the total amount outstanding on your loan. This is a tough one, because whoever owns your loan must agree to walk away from that money. But sometimes it makes the most sense . Taking a a write-down of, say, $10,000, is often more attractive to an investor than incurring even higher costs of foreclosure and reselling the home.

Other modifications take the amount past due, called your arrearage, and roll it into the principal balance (total amount still owed), then spread your payments out over the remaining years of your loan, including the arrearage. In this case, the total amount owed goes up, so your payments go up, too. But because the cost is spread over a number of years, the monthly increase is small. This can help someone who can afford monthly payments but has fallen behind and can't afford to make it up all at once. For many homeowners, past-due payments represent a dark tunnel with no visible light at the end. This type of mod puts a light at the end - and it isn't just another train coming at you.

There are many modification plans out there, and only your servicer can tell you what you might qualify for. Be aware that different servicers will have access to different programs. Believe me, it is absolutely the goal of the servicer to keep you from losing your home. But the servicer can only do what is legally and viably available for your specific case.

In my next post, I'll cover tips to help you navigate your way through this process.