If you are in a situation where a loan modification may be helpful, be careful. Simply because the loan modification results in a lower monthly payment doesn’t necessarily mean it’s helping you in the long run.
I had the opportunity to review a loan modification sent out by “XYZ Lender”. The cover letter said in essence, ‘In our efforts to try to help you, please review the loan modification enclosed. If you agree, all you need to do is sign it, send in the requested supporting documents and a good faith check in the amount of the new monthly payment and you are done.’
On the surface - the modification looked good. They had lowered the interest rate substantially, which in turn reduced the monthly payment. They kept the term the same, so it looked good.
There was a substantial monthly cost saving to the homeowner. All is good right?!
Hm...? Not really. Lender’s are in the business to make money and they are very good at manipulating numbers.
What they neglected to point out is, they had completely dismissed the years of payments that had already been made, which added up to about $15,000 - about half of the $35,000 original balance. They also used the loan modification to reset the new principal balance at $28 dollars below the original amount loaned.
There is the argument that, since interest is paid first, there really was very little paid towards the principal balance. But since this loan is a no documentation, stated, adjustable rate loan, that had been turned over to MERS - there is a good chance their right to foreclose could be successfully challenged.
More importantly, this loan is in a small, second position. There’s a larger first position loan, on the home that is currently under negotiations. Due to the market value of the home, if the first position loan actually forecloses, the second position will either get nothing or a small token amount from the first lien holder to just go away.
The bottom line is, when calculating the $15,000 already paid into the cost of the loan, the effective interest rate got pushed right back up beyond what the original interest rate is.
Another issue to take into consideration is their motivation for voluntarily submitting a loan modification. It was never requested by the borrower. There were a couple of line items in the modification contract that served to underscore “XYZ Lender’s” legal standing with regard to this particular loan.
I sincerely believe their primary motivation is to have the homeowner “voluntarily” acknowledge via a contractual agreement, “XYZ Lender’s” right to negotiate, collect and otherwise manage this debt.
At my suggestion, the loan modification was “modified”. The homeowner reviewed the terms of the contract with an attorney, and made prudent adjustments.
The contract was re-typed using the format provided, making changes in verbiage and terms. Verbiage was altered to allow for future challenges to the legality of the original loan and the "Lender's" right to collect and/or foreclose.
The principal balance was adjusted to reflect what had been paid, and interest was changed to reflect low market rates, which in turn reduced the monthly payment even further.
This revised loan modification was signed and enclosed along with the requested supporting documents, and returned to the lender in their prepaid mailing package.
Oh, the good faith check was adjusted based on the revised numbers. There was also a small statement printed on the check that said, “In cashing this check “XYZ Lender” accepts the terms of the loan modification dated “xx/xx/2011”.
Finally, a copy of the check laid across the revised loan modification, showing some of the changes was made.
There was no real expectation that there would be any response from the “Lender”. But the thought behind this entire process was, it didn’t hurt to try.
The package was mailed within the deadline imposed by the “Lender”. And then we waited.
A week passed and nothing happened. But, on the 8th day, the homeowner's bank showed the check was cashed.
Does this mean the contract was accepted? Does the cashing of the check provide the homeowner a legally binding contract? Not necessarily. But, maybe. If nothing else, it could tip the scales in the direction of the homeowner. We’ll have to wait and see.
In the meantime, the homeowner is going to begin making monthly payments based on the amount “agreed” upon in the revised loan modification. Time will tell...
