How to choose the right mortgage modification strategy


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Some struggling homeowners seeking long-term financial relief are pursuing loan modifications with their lenders. But a recent legal settlement serves as a cautionary tale that underscores the importance of knowing what your modification involves and determining if it’s right for your needs.

Case in point: The New York state attorney general alleges that Caliber Home Loans engaged in “unfair and deceptive” practices by prioritizing interest-only and short-term modifications to mortgages in the state, with some borrowers paying more after a set period and facing a higher risk of default. As a result, the lender was recently ordered to provide up to $17 million in loan forgiveness to customers allegedly impacted by those tactics.

“There is no need for secrecy behind loan modification programs, which have kept homeowners in the dark about their best options for years. The industry can — and should — be adopting measures that provide sustainable and affordable modifications, as well as more transparent communications with homeowners,” New York Attorney General Letitia James said in a statement.

Caliber, owned by Lone Star Funds, said this about the New York action in an emailed statement: “While Caliber does not agree with certain of the characterizations expressed in the New York Attorney  General’s press release, we are pleased to resolve this legacy matter from 2015 on terms which provide relief to severely distressed customers.   We are proud of our ability to have helped over 120,000 homeowners stay in their homes during the past ten years.”

The crucial takeaway for those seeking modifications:  “Borrowers need to understand what they’re signing up for, especially during times of distress like the current pandemic,” says Rick Sharga, president/CEO of CJ Patrick Company, a real estate consulting firm in Trabuco Canyon, California. “It’s essential to understand the terms of a loan modification, including what your new payments are going to be, if the changes are temporary or permanent and what the long-term implications are as far as overall loan cost.”

Types of loan modifications

Charles Gallagher, an attorney and partner at St. Petersburg, Florida-based Gallagher & Associates Law Firm, P.A. — which represented several clients in foreclosure who sued Caliber Home Loans — says there are two kinds of loan modifications typically offered by loan servicers/lenders.

“One is a streamline modification where the borrower does not provide financials to underwrite and the servicer or lender provides a modification with monthly payment terms,” says Gallagher. “The second is a more standard modification that requires some underwriting on the part of the lender or servicer to test for repayment viability; this requires you to provide proof of income and related financial documents.”

Note that a loan modification is different from the CARES Act forbearance program.

“A loan modification entails changes made to the terms of the loan itself — usually reducing the interest rate or extending the length of the loan. This allows you to lower your monthly mortgage payment and, ultimately, prevent default and foreclosure,” Sharga says.

Usually, these lender-approved modifications are temporary and intended to help a borrower get through a short-term financial challenge, Sharga notes. The modification type, term and details can vary from servicer to servicer and may fall under guidelines established by Freddie Mac, Fannie Mae, the FHA or VA for government-backed loans or by contractual terms for private lender-owned loans or loans in mortgage-backed securities. Each state may also have particular requirements for loan modifications.

By contrast, a forbearance permits you to skip monthly payments completely for a predetermined period agreed to by the lender; these deferred payments may be due in one lump sum after the forbearance period, or rolled into your remaining loan balance.

What to look for in a loan modification

If you’re having trouble paying your monthly mortgage, especially due to the coronavirus, first consider requesting forbearance from your servicer or lender. Loans backed by government programs, which include the vast majority of mortgages issued in the U.S., can be put into forbearance with no payments for up to a year on request.

If you seek a modification, the terms are up to you and the lender. Avoid short-term solutions that will just leave you with a larger hole to climb out of.

“Any loan modification that bests the terms of your original loan and keeps you in your home is generally a win,” says Gallagher. “If the modification discounts the existing interest rate, lowers the monthly payment, waives missed payments and late fees, or discharges principal, that’s favorable to the borrower.”

Avoid any modifications that are interest-only and adjust to a higher rate, add unnecessary costs to your loan in the form of penalties, fees or processing charges, or result in a large balloon payment due after a certain period, Sharga recommends.

“To be safe, have an attorney or credit counselor review your loan modification documents before you sign them,” adds Sharga.

Featured image by RBL/Bauer-Griffin of Getty Images.

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