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Loan Modification in Southern California: A Guide

Home values throughout Southern California have experienced a significant decline over the past several years. This has placed numerous homeowners in an impossible dilemma: their monthly loan payment is not affordable and selling the home is not an alternative because its value is less than the mortgage.
If you’re in this predicament, you may have considered loan modification. Though loan mod is a good option for some homeowners, a short sale is often the better solution for reducing debt and growing personal net worth. 
Within this guide, I’ll explain loan mod in Southern California, debunk some widespread myths and help you decide if short sale is the better choice for you. 

What is Loan Modification?

The terms of the note are restructured in a loan mod. This can include dropping the loan’s interest rate or prolonging the term (number of payments) to hopefully reduce the homeowner’s monthly payments.  
While most Southern California lenders are inclined to extend the loan to 40 years, take note that most interest rate decreases are only temporary. The thought process behind this is that the economy will eventually recover, permitting the bank to later bring the payments back up to the higher rate.

Myths and Realities of Loan Modification in Southern California

Many myths exist about loan mod. In this section, I’ll call into question three of the most common myths.
  • Myth: Loan mod allows forgiveness of accrued penalties, fees and interest on any skipped payments. 
  • Reality: Lenders are choosing to add the accrued penalties, fees and interest from the missed payments to the balance of the loan. 
  • Myth: A loan modification will lower the payments.
  • Reality: In a high percentage of California loan mod cases, payments actually increase because of the addition of accrued penalties, fees and interest on missed payments. Lenders are stretching the loan term to 40 years and may offer slight decreases in the interest rate for two to five years to make the reconfigured payments seem helpful. However, in more than 30 percent of cases, loan modification payments will be more than before the loan mod, according to the Fitch Bank Rating Agency.
  • Myth: A loan mod reduces the principal balance.
  • Reality: Reductions to the principal balance come to fruition only in rare instances. These decreases are most likely to take place when complex legal or financial affairs are being negotiated or litigated with the bank. 
With the realities of loan modification considered, short sale is often a preferable option for Southern California homeowners looking to release themselves from debt and boost personal net worth.

Quick Tip

A forbearance agreement is different than a loan modification. In forbearance agreements the back payments owed are reconfigured without making changes to the original terms and conditions of the loan. As a result, payments rise with forbearance agreements since the back payments are being paid off over time.  

How to Pursue a Loan Modification in Southern California

A couple of common methods for going after a loan modification in Southern California include:
  1. Applying directly with the bank. The lender prefers this approach because most homeowners are powerless to negotiate significant decreases in the interest rate and debt.
  2. Working with a Southern California loan modification company. These companies are usually highly skilled attorney- or real estate broker-owned companies and occasionally have success in addressing legal matters in order to secure favorable interest rates and debt reductions. Though, it should be understood that the success rate in this industry is largely unsatisfactory overall for most homeowners.
  3. Partnering with a skilled California short sale investor or negotiator. While this may sound unusual or contradictory, this is a very sound approach, especially if affordability is of concern. Because lenders often realize that a short sale will result in higher losses than loan modification, the mere possibility that a homeowner is packing it in may cause them to make their most advantageous and final loan modification offer. This tactic can be used up front, but is usually employed when the borrower is no longer making ends meet and is not able to get a satisfactory loan modification. 

Loan Modification Eligibility

In Southern California, there is no eligibility requirement for securing a loan mod; however, the lender and borrower must arrive at an agreement on the change to the loan.
A Southern California lender will be financially motivated to approve a loan modification in some situations and unmotivated to grant permanent approval in others.  
Overall, loan modification has a greater chance of being approved when:
  1. The borrower has a hardship that has been settled or is resolvable soon.
  2. The authorization of a permanent loan mod is absolutely required to convert a non-performing loan into a permanently performing loan once again. 
In most cases, approval of a “trial” loan modification will be granted. To be a participant in a trial loan modification in Southern California, lenders usually require the borrower to commit to monthly payments at an agreed upon sum for a minimum of three months prior to giving permanent approval. Regrettably, many borrowers are placed in a trap because the lender might never grant permanent approval of the loan modification.  
Loan modification denial is likely to occur when:
  1. The lender determines that the homeowner cannot pay for the home.
  2. The lender is in disagreement that a borrower's hardship is can be resolved by loan mod.
  3. The lender believes that the borrower may continue paying even if the lender does not grant permanent approval. For example, if the lender determines that the borrower desires to keep the property “no matter what,” the lender has little motivation to provide permanent approval.

Most Loan Mods are Destined to Fail

According to the Fitch Bank Rating Agency, the average payment after loan mod is 64% of pre-tax income. In contrast, a new loan is generally not approved if the payments are more than 35% of pre-tax income because lenders understand that for a loan to be a success and avoid becoming a non-performing loan, homeowners need to be able to budget a reasonable portion of their income for other household expenses.
According to Fitch and others, this very high payment requirement makes loan mod an unworkable program destined to be unsuccessful. In its assessment, Fitch has been judgmental of the banks’ management of loan modifications, due to the low consent rate of permanent loan mods and the high failure rate following permanent loan modification approval.
Unfortunately, state and federal laws and government regulations have been powerless to force banks to into helping homeowners prevent foreclosure, due to their lack of ability to pressure banks into absorbing more of the financial losses that the housing crisis has caused.

Is Loan Modification Right for You?

Because of the considerable drop in housing values, loan modifications are not economically sensible for the majority of Southern California homeowners. If you are concerned with slashing your debts and expenses, a short sale can radically reduce your debt and increase personal net worth simultaneously.
Additionally, if you would like a loan mod in Southern California, yet have meager or no equity, a short sale can be brought to the table as a strategy to get your bank to make a satisfactory 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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