Observations about Mods

Posted by kevin on February 22, 2014 under Foreclosure Blog | Comments are off for this article

How can you evaluate whether you are being offered a fair modification. At a very basic level, you must ascertain that it lowers your payments enough that it is affordable to you. But the analysis should go beyond that.

Our starting point is to look at the total payments over the course of the loan pre-mod and post mod? We determine that by comparing total payments under the original loan versus your total payments under the proposed modification. This can be a little complex because a good mod may reduce interest, suspend interest, increase the term, capitalize arrearages with a balloon payment and/or reduce principal. All these components need to be considered. I have many clients who believe that they got a bad deal because there was not a principal reduction. However, if your interest rate is reduced from 10% to 4%, that is a considerable savings over the remaining term of the loan (whether extended or not). Moreover, in cases where my clients have not received principal reduction, the servicer usually offers to capitalize arrearages, place that amount in a suspense account with 0% interest, and have that amount paid at the end of the term or at sale as a balloon payment.

Some of my clients say that is not a good deal. My answer is that it depends. Let’s look at two different scenarios. In both cases, the loan will be amortized over 25 years and the amortized amount is $200,000. In the first scenario, however, the capitalized arrearages are $200,000 while in the second scenario, the capitalized arrearages are $50,000. Remember, there is no principal reduction. The monthly payment of the amortized portion (which is your monthly payment) is the same in either scenario; that is, roughly $1056 per month for principal and interest. Taxes and insurance should be the same. So, monthly payments are the same. The glaring difference is that at the end of 25 years, Homeowner A owes the lender $200,000 while Homeowner B owes the lender $50,000. At face value, one would say that Homeowner A got the better deal, and in many cases that is the correct analysis. However, in our next blog, we are going to look at these scenarios in a little more depth. There may be more to this story.