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Dec312010

Loan Modification in Los Angeles County, CA: A Guide

Due to the dramatic decline in home values in Los Angeles County, California over the past several years, many homeowners have found themselves in an impossible situation: their monthly loan payment is unaffordable and selling the home is not a solution because its value is less than the mortgage.
 
You may have considered loan modification, if you’re in this situation. Loan mod can be a workable option for some homeowners; however, a short sale is often the preferred solution for lowering debt and increasing personal net worth. Home Sales and Loan Modification in Los Angeles County, CAHome Sales and Loan Modification in Los Angeles County, CA
In this guide, I’ll give an overview of loan modification in Los Angeles County, discuss some common myths and help you decide if short sale is the right choice for you. 

What is Loan Modification?

In loan modification, the terms of the note are restructured. Reducing the loan’s interest rate or extending the term (number of payments) are both options to hopefully lower the homeowner’s monthly payments.  
 
Most L.A. County lenders will extend the loan to 40 years; however, it’s important to note that most interest rate reductions are only provisional. The lender’s logic behind this is that the economy will eventually recover, permitting the lender to later resume the payments to the formerly higher rate.

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

Many myths exist about loan mod. In this section, I’ll debunk three of the most prevalent myths.
  • Myth: Loan modification will allow forgiveness of accrued penalties, fees and interest on any missed payments. 
  • Reality: Lenders are electing to add the accrued penalties, fees and interest from the missed payments to the loan balance.
  • Myth: With a loan mod, payments will go down.
  • Reality: In a very large percentage of California loan mod cases, payments increase because of the addition of accrued penalties, fees and interest on missed payments. To make the restructured loan payments seem worthwhile, lenders are lengthening the loan term to 40 years and may offer small reductions in the interest rate for a few years. Nevertheless, in more than one third of cases, loan modification payments will be higher than prior to loan modification, according to the Fitch Bank Rating Agency.
  • Myth: A loan mod will reduce the principal balance.
  • Reality: Reductions to the principal balance occur infrequently, generally 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 the best option for L.A. County homeowners looking to rid themselves of debt and gain personal net worth.

Quick Tip

Loan modification and forbearance agreements are not the same. Forbearance agreements are a structuring of the back payments owed, though the original terms and conditions of the loan are not changed. As a result, payments will increase with forbearance agreements since the back payments are being paid off over time.  

How to Pursue a Loan Modification in Los Angeles County, CA

The most common tactics for pursuing a loan modification in Los Angeles County include:
  1. Applying directly with the lender. The lender prefers this route because most homeowners are unable to negotiate sizeable reductions to the interest rate and debt.
  2. Working with a Los Angeles County loan mod company. These are usually attorney- or real estate broker-owned companies. Loan mod companies are highly skilled and can have success in addressing legal issues in order to obtain good interest rates and debt reductions. However, the success rate in this industry is intolerable overall for most homeowners.
  3. Working with a skilled California short sale investor or negotiator. Though this strategy may sound odd or contradictory, it is actually very sound, especially if affordability is an issue. Because a short sale will often result in greater losses than loan modification, the mere possibility that a homeowner is giving up on the home may cause the lender to make their greatest and final loan modification offer. Homeowners can employ this strategy initially, but it is most often used when the borrower is not able to make ends meet and unable to get a satisfactory loan modification. 

Loan Modification Eligibility

Officially, there is no eligibility requirement for getting a loan modification in Los Angeles County, CA; however, the lender and borrower must be able to come to an agreement on the adjustments to the loan.
 
In some circumstances, an L.A. County lender will be financially motivated to grant a loan modification and others in which the lender is unlikely to grant approval.  
In general, loan modification approval is more likely when:
  1. The homeowner has a hardship that has subsided or will subside soon.
  2. Permanent loan modification approval is a must to make the non-performing loan become a permanently performing loan yet again.
Borrowers can get approval of a “trial” loan modification in nearly all cases. Lenders in Los Angeles County generally require the borrower to make monthly payments at an agreed upon amount for a minimum of three months during a trial loan mod before granting permanent approval. Unfortunately, this situation can place borrowers in a trap because the lender may never grant permanent approval of the loan mod.  

Potential Loan Modification Deal Breakers:

  1. They determine that the borrower cannot afford the property.
  2. They are not in agreement that loan modification is a solution to the borrower's hardship.
  3. They conclude that the borrower might continue to make the loan payments even if the lender does not permanently approve the loan mod. For example, if the lender believes that borrower wants to stay in the home “no matter what,” the lender has no motivation to provide permanent approval.

Most Loan Mods are Destined to Fail

According to the Fitch Bank Rating Agency, the average loan modification payment is 64% of pre-tax income. However, lenders generally will not approve a new loan if the payments are more than 35% of pre-tax income because they understand that the key to ensuring that a loan remains successful is giving borrowers the ability to allocate a reasonable potion of their income for other household necessities.

Due to the extremely high payment requirement, loan modification is an unworkable program destined to fail, according to Fitch and others. In its assessment, Fitch criticizes the banks’ handling of loan modifications, because of the low approval rate of permanent loan mods and the high rate of failure after permanent loan modification approval is provided.
  
Unfortunately, federal and state CA loan mod laws and government regulations have been unable to pressure banks to do more to help homeowners avoid foreclosure, due to their inability to force banks into absorbing more of the financial losses that are resulting from the housing crisis.

Is Loan Modification Right for You?

With the significant drop in housing values in Los Angeles County, loan mods are not a financially wise choice for the vast majority of CA homeowners. If you’d like to reduce your debt and overall expenses, a short sale is a great way to release yourself from debt while also increasing personal net worth.
 
Plus, if you’re looking for a loan mod in Los Angeles County, CA, yet have little or no equity, a short sale can help you convince your bank to make a reasonable loan modification offer.
 
For more information on California loan modification and short sale, check out 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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