Loan modifications are generally offered to borrowers who are off track—not making regular, on-time mortgage payments—but who want to stay in the home and begin paying again. Here are a few best practices for lenders.
1. Offer terms to the borrower that are more attractive than the ones they agreed to on the original Note. In some cases, similar conditions may apply, but there’s some forgiveness or deferral of past due amounts to incentivize the borrower to resume paying.
2. Offer a rate reduction. BUT…don’t set the rate too low. Lowering the rate decreases the Note holder’s investment yield. I’ve seen a lot of 2% modified Note rates that were fixed to maturity, making the yield really unattractive (to prospective Note buyers).
3. Avoid extending the maturity date. It’s tempting to extend the maturity date to 40 years, thereby lowering the monthly payment to an amount that’s more feasible for the borrower. But it will likely impact the saleability of the Note. Most investors don’t want to own a Note with a remaining term that’s more than 30 years.
4. Bring the taxes current. When borrowers are behind on their mortgages, they’re typically delinquent on taxes so it’s best to bring the taxes current as a condition of the modification. Many lenders neglect to address the back taxes or liens that can jeopardize the lender’s position if those taxes were to go to sale or they’re not redeemed on time.
5. Offer a trial modification, which is an excellent way to see if a borrower is going to resume making his/her payments before offering a permanent change. Ask the borrower to make at least three to six on-time payments before the permanent modification is executed.
Be well! And if you’re interested in selling your mortgage Note—increasing cash flow and liquidity—reach out.
Photo credit: Joshua Coleman