What Is a Loan Work-Out and How Do They Work?

Loan Work-Out

A loan work-out, otherwise known as a loan modification, is a process by which your mortgage lender agrees to change or “modify” the existing terms of your mortgage, so that you are able to continue making payments on the loan, and at the same time, avoid losing the property through the foreclosure process.

Modifications can result in lower monthly payments and save your home from further delinquent payments that can result in foreclosure. Examples of loan work-outs include any of the following:

  • Reduction of Interest Rate
  • Extension of loan term (ie: converting a 30 year mortgage to a 40 year mortgage)
  • Converting an Interest Only or Adjustable Rate Mortgage into a Fixed, Principle & Interest Payment
  • Recapitalizing the delinquent amount onto the balance of your mortgage
  • Reduction in the amount that you owe on your mortgage

Obtaining a loan modification is not always a straight forward process, and often times, frustrated homeowners will contact us after several failed attempts at obtaining a loan modification on their own. It is important that you speak with an attorney who is experienced in these matters and who has the knowledge of how to approach your own individual situation, as there may be several issues at hand with respect to your mortgage problems.

Financial Relief Law Centre examines your overall situation and identifies the issues and designs a customized approach that should be taken in order to obtain a loan work-out or loan modification solution for your situation. In addition to reviewing your income, expenses, and debt to income ratios to determine if you are a good candidate, there are several approaches that should be utilized, depending upon your situation.

Examination of Property Records – When you acquired your mortgage – deed of trust, that security instrument was filed and recorded in relation to your property, with the county recorder’s office. Similarly, if you default on your mortgage payments and a Notice of Default (NOD) is issued, it is also recorded against your property.

A Notice of Default can be filed as soon as you are 90 days past due on your mortgage payments, and triggers the foreclosure process. Generally, if you continue to be another 90 days delinquent on your mortgage payments, the lender will have the right to issue Notice of Trustee’s Sale (NOTS), providing notice that a sale date has been assigned and that it is the intention to foreclosure on the property.

California foreclosure and recording statutes have requirements for this process in order to ensure that proper notice is given to the homeowner, and that only the entity with the proper authority is foreclosing on the property. Additionally, depending on when your mortgage was acquired, there may also be a requirement for the lender to initiate contact with you to explore loss mitigation options, such as a loan modification.

It’s therefore vital to ensure that the property records are reviewed and examined for any deficiencies in your property records. Financial Relief Law Centre examines property records for all of our clients to determine if a loan work-out or any other courses of action are recommended in order to challenge or dispute your foreclosure and help you keep your home.

Past Failed “Trial Modification” Plans – One common issue that homeowners encounter when they are trying to obtain a modification on their own is that, after they apply for a modification with their lender, their lender will issue what’s known as a “HAMP” trial payment plan.

The lender will issue a notice informing the homeowner that they’ve been approved for a HAMP trial modification, and instructs the homeowner to make, typically, 3 monthly payments. Once those 3 monthly payments are made on time, the lender states that the homeowner should receive their permanent modification. Unfortunately, a multitude of homeowners have complied with their trial plans, making 3 or more on time payments, however never receive a permanent modification.

This causes the homeowner to only fall further into delinquency, and they now risk losing their home, despite the fact that they have complied with the instructions of their mortgage servicer.

This problem has revealed serious flaws in how mortgage servicers have implemented the HAMP program, and even the Office of the Comptroller of the Currency (OCC), the government entity responsible for regulating most of the largest mortgage servicers, has ordered that servicers implement programs to rectify these deficiencies and in most cases to account for monies paid by the homeowner to the servicer pursuant to a HAMP trial payment plan.

It’s important that if you’ve experienced this situation that you bring it to the attention of your attorney, so that the appropriate action can be taken to escalate your file, documenting your situation, and filing a consumer complaint with the appropriate regulator so that your file can receive the attention it needs in order to rectify the trial payments and get you back into review for a loan modification.

Regulatory Complaints – As discussed above, one tool that can be utilized in the loan work-out modification negotiation process is to file a consumer regulatory complaint with the appropriate regulator, whether it’s the OCC, or a different entity. This is most important when consumers experience unwarranted and unnecessary difficulty in attempting to work with their mortgage servicer for a modification.

While a major issue that homeowners experience is the failed HAMP trial payments, a basis for regulatory complaints can include many more issues that are commonly experienced by homeowners. These issues include: servicers claim to not have received homeowner’s modification application, despite the fact that homeowner’s have repeatedly sent those documents to the servicer, lack of communication and response from servicers, perpetual review processes without ever receiving a meaningful update, lack of knowledge or competence by servicer representatives, misrepresentations made by the servicers, negligence in handling a homeowner’s modification request, failure to comply with MHA guidelines, including failure to solicit a homeowner for MHA (if the investor is a participant), and failure to exhaust non-foreclosure options prior to foreclosing.

Having a knowledgeable attorney who can help loan work-out by effectively identify these issues and leverage them to your lender, servicer and regulator, can make the difference between losing your home and everything you’ve worked so hard for, and obtaining an affordable mortgage payment and a sense of security for your future.

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Paul Austin

Paul is a writer living in the Great Lakes Region. He dabbles in research of historical events, places, and people on his website at Michigan4You. When he isn't under a deadline, you can find him on the beach with a good book and a cold beer.

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