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Dec312010

Loan Modification in Los Angeles, CA: A Guide

Home values in Los Angeles, Calif., have declined dramatically over the past several years. This has placed many homeowners in an impossible situation: their monthly loan payment is too high and selling the home is not an option because its value is less than the mortgage.
 
If you’re in this position, you may have considered loan modification. While loan mod is a viable option for some homeowners, a short sale is often the best solution for reducing debt and increasing personal net worth. Home Sales and Loan Modification in Los Angeles, CAHome Sales and Loan Modification in Los Angeles, CA
In this guide, I’ll explain loan modification in Los Angeles, debunk some common myths and help you determine if short sale is the better choice for you. 

What is Loan Modification?

A loan modification is a restructuring of the terms of the note. This can include reducing the loan’s interest rate or extending the term (number of payments) to hopefully reduce the homeowner’s monthly payments.
 
While most L.A. lenders are willing to extend the loan to 40 years, be aware that most interest rate reductions are only temporary. The logic behind this is that the economy will eventually improve, permitting the lender to later resume the payments to the previously higher rate.

Myths and Realities of Loan Modification in Los Angeles, Calif.

There are many myths about loan mod. In this section, I’ll debunk three of the most common myths.
  • Myth: Loan modification will grant forgiveness of accrued penalties, fees and interest on any missed payments. 
  • Reality: Lenders are opting to add the accrued penalties, fees and interest from the missed payments on top of the loan balance. 
  • Myth: Payments will go down with a loan modification.
  • Reality: In a very large percentage of California loan modification cases, payments go up due to the addition of accrued penalties, fees and interest on missed payments. To make the restructured loan payments appear beneficial, lenders are extending the loan term to 40 years and may offer slight reductions in the interest rate for two to five years. However, in more than one third of cases, loan modification payments will be higher than before the loan modification, according to the Fitch Bank Rating Agency.
  • Myth: The principal balance will be reduced in a loan modification.
  • Reality: Reductions to the principal balance occur only in rare instances. These reductions are most likely to occur when complex legal or financial issues are being negotiated or litigated with the lender. 
Based on the realities of loan modification, short sale is often a better option for L.A. homeowners looking to free themselves from debt and gain personal net worth

Quick Tip

Loan modification is not the same as a forbearance agreement. Forbearance agreements are a structuring of the back payments owed without changing the original terms and conditions of the loan.
 
As a result, payments will increase with forbearance agreements because the back payments are being paid off over time.  

How to Pursue a Loan Modification in Los Angeles, CA

The most common methods for pursuing a loan modification in Los Angeles include:
  1. Applying directly with the lender. This is the method preferred by the lender because most homeowners are unable to negotiate significant reductions to the interest rate and debt.
  2. Working with a Los Angeles loan mod company. These companies are usually attorney- or real estate broker-owned companies. Loan modification companies are highly skilled and sometimes have success in addressing legal issues in order to obtain favorable interest rates and debt reductions.  However, it should be noted that the success rate in this industry is unacceptable overall for most homeowners.
  3. Working with a skilled California short sale investor or negotiator. While this may sound odd or contradictory, this is actually a very sound strategy, especially if affordability is an issue. Because lenders often determine that a short sale will result in greater losses than loan modification, the mere prospect that a homeowner is calling it quits may cause them to make their best and final loan modification offer. This strategy can be used initially, but is most often used when the borrower is stretched to the limits financially and unable to get a satisfactory loan modification.

Loan Modification Eligibility

Officially, there is no eligibility requirement for obtaining a loan modification in Los Angeles, CA, although the lender and borrower must be able to reach an agreement on the change to the loan.
 
There are some circumstances in which an L.A. lender will be financially motivated to approve a loan modification and others in which the lender is less likely to grant approval.  
 
In general, loan modification is more likely to be approved when:
  1. The homeowner has a hardship that has been resolved or is resolvable soon.
  2. The approval of a permanent loan modification is absolutely required to make the non-performing loan become a permanently performing loan once again. 
Approval of a “trial” loan modification can be obtained in nearly all cases. To participate in a trial loan modification in Los Angeles, lenders generally require the borrower to make monthly payments at an agreed upon amount for a minimum of three months before granting permanent approval. Regrettably, this creates a trap for many borrowers because the lender might never provide permanent approval of the loan mod.  
 
Loan modification is likely to be denied or not permanently approved when:
  1. The lender determines that the borrower cannot afford the property.
  2. The lender does not agree that a borrower's hardship is resolvable by loan modification.
  3. The lender concludes that the borrower might make the loan payments even if the lender does not provide permanent approval. For example, if the lender believes that the borrower wants to keep the property “no matter what,” the lender has no incentive to provide permanent approval.

Most Loan Mods are Destined to Fail

The average loan modification payment is 64% of pre-tax income, according to the Fitch Bank Rating Agency. In contrast, lenders generally will not approve a new loan if the payments exceed 35% of pre-tax income because they understand that for a loan to be successful and avoid becoming a non-performing loan, borrowers need to be able to allocate a reasonable portion of their income for other household necessities.
 
This extremely high payment requirement makes loan modification an unworkable program destined to fail, according to Fitch and others. In its assessment, Fitch has been critical of the banks’ handling of loan modifications, due to the low approval rate of permanent loan mods and the subsequently high failure rate of loan modifications after permanent approval is provided.
 
Regrettably, federal and state CA loan mod laws and government regulations have been unable to force banks to do more to help homeowners prevent foreclosure, due to their inability to pressure banks into absorbing more of the monetary losses that are resulting from the housing crisis.  

Is Loan Modification Right for You?

Because of the significant drop in housing values, loan mods are not economically wise for the vast majority of Los Angeles homeowners. If you are concerned with reducing your debts and expenses, a California short sale can dramatically reduce your debt and increase personal net worth at the same time.
 
Additionally, if you desire a loan modification in Los Angeles, CA, yet have little or no equity, a short sale can be used as a strategy to get your bank to make a reasonable loan modification proposal.
 
For more information on California loan modification and short sale, download my free book, “Loan Mods, Why Short Sale May Be A Better Option For You,” or call me at 1-888-REHelp9.

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