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Mortgage Loan Modifications: Five Keys to Approval

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Whether you're underwater because of fallen home values or are facing foreclosure as a result of financial hardship, modifications to your mortgage rate or mortgage features can provide relief. Mortgage loan modifications can help you in times of financial distress by lowering mortgage rates and monthly payments or by converting adjustable mortgage rates to fixed rates. In short, mortgage loan modification programs offered through mortgage loan servicing companies are designed to help homeowners keep their homes while preventing foreclosure losses to lenders.

Behind Mortgage Modification: The Decision Makers

Homeowners are frequently frustrated with the time and paperwork required for mortgage loan modifications. Mortgage modification typically requires review by a minimum of two entities that can influence approval of your application to modify:

  • Mortgage investor or holder. Your original mortgage lender likely sold your mortgage to a mortgage investor (most often Fannie Mae or Freddie Mac).
  • Mortgage loan servicer. The mortgage investor hires a mortgage servicer (which could be the original mortgage lender, but not always) to collect payments, pay taxes and insurance, and handle customer care. Mortgage loan modification requests are handled through your loan servicer.

Modifications may require additional approval under certain circumstances. These include:

  • Multiple mortgage investors. The modification approval process may depend on whether your loan was sold to a mortgage investor as an individual loan or as part of a group of? mortgage loans used to create mortgage-backed securities. Loan modification is more difficult in the latter case, where there are competing interests among lenders and greater market uncertainty.
  • Mortgage insurance. If you made a down payment of less than 20% of your home's value, you have mortgage insurance, which reimburses your lender in the event of foreclosure. In the case of a mortgage modification, the mortgage insurer (MI) must approve your modification.
  • Home equity loan. Your mortgage lender will require "subordination" of any home equity financing before it can complete your modification. A modification requires recording documents that jeopardizes your first mortgage's place in the sequence of liens, but your first mortgage holder will want to maintain its place as first lien holder against your home. Mortgage servicers typically ask home equity lenders to sign a subordination agreement or to release their liens. If your home equity lender doesn't cooperate, a modification of your primary mortgage cannot be completed.

Given the number of players involved, there is certainly no guarantee that asking your loan servicer for a modification means you will receive one. Even recent government efforts to encourage mortgage loan modifications have led to fewer modifications than the Obama administration had hoped for. However, though the mortgage modification process can seem daunting and slow, understanding the process and what different players have at stake can make the process less frustrating.

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Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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