1st Lien Modification Question

4 Replies

I have a question regarding modifying a defaulted 1st lien on a property. Here is an example. The original payment was extremely low, say $200. It was since defaulted on years ago, and now arrears have accrued. Is there anything preventing the note holder of working out a modification with the borrower where the monthly payment is MORE than the original payment they have defaulted on?

To be clear it would now be more because the total balance they owe would be more, etc. I have never run into a situation like this so I thought I would get some feedback. Thanks!

Josh

Joshua Andrews, Notable Investments, LLC | [email protected] | 480.438.6920 | http://www.NotableInvestors.com

Hi Josh, good question. One thing you might want to consider is a forbearance agreement for 6 months to make sure they can even handle the new payments, since in the past $200 was too much. Then, if it's a homeowner, use a RMLO to mod the loan to stay in compliance with all the laws. If its an investor, you can use a standard HUD note template and write it yourself. Good luck!

Medium silverwood stacked logoChristopher Winkler, Silverwood Capital, LLC | 1‑949‑791‑7904 | http://silverwoodllc.com

Hi Josh,

Did you end up taking care of this situation? How often do you come across loan modifications? Looking forward to hearing from you!

Best,

Lira

There is no rule which prevents a modification from increasing the periodic payment or total amount due under the note.  The general rule is that modifications should be a net benefit to a borrower in some manner.  In situations where the payment increases this may be warranted in order to create a way to pay down accrued interest, fees and advances.  It may also avoid foreclosure.  

A modification which adjusts a borrower's payment up may still fall under attack in FC court.  The modification should not seem predatory.  The opposite of net benefit to borrower.  I suppose you could think of that as a one sided benefit - only to the mortgagee.

The typical barometer is "payment shock" though it is not specifically defined by $X or X% above the previous payment.  There has been much discussion in the new DF rules to carve out, in conversation at least, implications of a rule regarding a Borrower's payment shock in an effort to service an already existing loan both through modification and distressed refinance.  Payment shock can occur by way of different means, adjustable rate loans being a primary culprit.  When present or potentially present, care should be given to the Borrower's capacity to repay.  

A RMLO license is required if a third party negotiates a modification and wants to earn a fee.  A Mortgagee and a Borrower can certainly discuss the matters on their own and come to an agreement with no RMLO present since they are both interested parties.  Regardless of property occupancy designation.  As far as I know there is no requirement or practice of an RMLO affixing their NMLS to a modification agreement.  I would not rely on any RMLO to prepare any modification agreement.  Use an attorney.  Modification Agreements are common in content not templated in form.