Paul J. Raine, PLLC

 

During good economic times, home prices typically trend upwards.  In those conditions, a mortgage servicer does not have much incentive to modify a loan or accept less that what the borrower owes. However, when home prices trend downward, the bank knows that losses can be significant if the bank goes through the foreclosure process. The prospect of significant losses has given banks the impetus for agreeing to loss mitigation options such as loan modifications and short sales that they would not otherwise have considered.  Also, recent efforts by the federal government to stem the tide of mortgage foreclosures have given rise to incentive payments.  The federal government now pays banks and servicers to encourage them to successfully negotiate short sales and loan modifications.

 

 

A short sale is an agreement by the bank to accept less for the property than the borrower owes on a mortgage.  Short sales were typically a "last resort" loss mitigation effort by the bank when a loan was in default, but have become commonplace in the mortgage landscape of 2009.  A borrower must be careful in negotiating a short sale because the bank may seek to recoup their losses by later suing the borrower for a deficiency judgment. 

 

There is no guaranteee that the bank will accept a short sale offer.  Even though the offer may seem perfectly reasonable, each bank has different criteria as to whether they will accept an offer for less than what the borrower owes.  Acceptance of a short sale offer may also depend upon timing of the foreclosure process - whether the mortgage has already been foreclosed, is in redemption or prior to the sheriff's sale. The bank may be more willing to agree to a short sale before spending money on legal fees to foreclose on the property.

 

The short sale process can often take a considerable amount of time and borrowers often get frustrated with the lack of updates from the bank on what is happening with the short sale offer.

 

 

A loan modification is an agreement between the bank and the borrower to change the terms of the loan to make the monthly payments more affordable for the borrower.  The interest rate can be lowered or the term of the loan can be lengthened. Also, the amount in arrears can be tacked on to the end of the loan to get the borrower out of the default condition.

 

If the loan is securitized by Fannie Mae or Freddie Mac, the federal Home Affordable Modification Program (HAMP) will apply.  Even if Fannie Mae or Freddie Mac are not involved, many banks have agreed to modify loans according to the HAMP guidelines.