Home Loan Modifications

A Loan Modification is a permanent change in one or more of the terms of a borrower’s loan, allows the loan to be reinstated, and is intended to result in a mortgage payment that a borrower can afford.

The process entails negotiating with a secured lender to modify the terms of an existing loan. This is agreed to in the alternate of a foreclosure, short sale, or deed in lieu of foreclosure, and is often done after loan payments have been delinquent.

This can be done stand alone or as part of a Chapter 7 or Chapter 13 bankruptcy. Modifications work most often when they are attempted on a borrower’s primary residence. Unlike with bankruptcy cases, there are no certain outcomes in loan modification.

The desired result is a lowered monthly payment, although upon review not all loan modification offers make sense for the borrower.

Here is an example of a typical loan modification scenario:

The current mortgage is a 30-year variable rate loan. The loan originally had affordable payments of $1,300 per month, but the rate has significantly increased over the past year or two, and now payments are $2,200 per month. Try as they may, the borrowers cannot afford this payment, but still want to retain the home. Attempts to refinance have failed for a number of reasons (home is “underwater” in regards to value, the borrowers have insufficient credit to get a new loan, or some combination of these and other factors) but the borrower wants to retain the home. There is sufficient income in the home to support some monthly mortgage payment, just not $2,200 per month.
Sometimes in cases like the above I am able to negotiate with a lender resulting in some form of one or more of the following:

  • A reduction in the monthly interest rate to a lower fixed rate.
  • An increase in the length of the terms of the loan. For instance, taking a 240-month loan and refiguring it into a 480-month loan.
  • A principal forbearance until the last loan payment is made. For instance, having $50,000 of a loan sit interest free until month 480. This sounds counter intuitive, but if the mortgage is paid off in month 480, there would presumably be plenty of principal available to refinance this balance. This amount would also be significantly lower as the time value of money would make $50,000 significantly less burdensome in 480 months.
  • In certain rare cases, a principal reduction of some amount. While certainly not the norm, this has occurred in a handful of cases I have worked. There may be tax consequences with such a principal write down (especially if this is a non-bankruptcy case), so be prepared to talk to a tax professional if this is part of your result.

One frustration with loan modifications is there is no guarantee of result. Although there are government backed plans in place, and there has been a recent mortgage master settlement with the federal government, it is still largely based on the borrower’s personal situation. After a year or two of working with a lender, you may be no better off than you were prior to the loan modification review.

I have helped well over 100 clients with their loan modifications. If you are considering a loan modification or have attempted to handle a modification and become frustrated with the process (with the repeated request for the same documents, unreasonable time requests, seemingly endless phone hold times, denial after denial), my offices may be available to help.

I offer a free consultation if you are considering a loan modification. Call me at 503-278-5400 or toll free at 888-560-8146 to schedule an appointment. My law office is located in Beaverton, just outside of Portland, Oregon.