IMPORTANT UPDATE 09/2008: In the best interest of my clients, I have decided against negotiating short payoffs and loan modifications with lenders AT THIS TIME. Please read on... The financial landscape of our U.S. credit markets will soon change. Due to pending government legislation for the swift bail out of banks from their troubled mortgage debt, lenders may soon take a new stance in helping HOMEOWNERS rather than favoring their stockholders (see Critical News below on Sept 19th). I anticipate it will take at least 3 to 4 weeks until the government releases official details of the largest bail out in American history. At approximately the same time, official loan guidelines for the FHA bail out plan should also be released. If your present situation can wait, I would suggest that you also wait and see if this new fed proposal will benefit you. Thank you for your patience, and please do check back with me again soon for more details. ONCE WE HAVE A SOLID UNDERSTANDING OF THIS NEW PLAN, AND THE GOVERMENT HAS GIVEN THEIR LEGAL STAMP OF APPROVAL, I MAY IMMEDIATELY OPEN UP NEGOTIATIONS. In the meantime, I would be pleased to give you FREE advice. Feel free to share your situation with me, and I'll give you my realistic opinion of possible workouts from your lender. *Randy Miguel is not an attorney, and any and all advice provided is not to be construed as legal advice.


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Clients often inquire, "What is your success rate?" or "What are the chances for a short refinance?" Most people do not want to hear this, but it depends. Loss mitigation is a highly complex process, with the ultimate decision belonging to the lender. Certainly it is not as easy as it was to qualify for your home purchase loan or refinance. In qualifying for a home loan you get a simple yes or no answer. In qualifying for loss mitigation, you will instead get certain degrees of maybe. I am writing this article to help people better understand which homeowners in specific situations may have a greater opportunity for lender aid, and explain why lenders may decide to help - or not.

First of all, everyone's situation is uniquely different, so to try to assess your ability to get a loan mod on an agency's overall "success rate" is probably not the best way to go about it. I've seen other sites boasting 90% success or greater, but if you read between the lines, what they really mean to say is that they have a 90% shot of taking your money. Loss mitigation agencies truly cannot guarantee you any success at all, and neither can I. However, I can help you better understand a lender's reasoning in offering assistance, so you can make the determination on your own as to whether or not a loss mitigation case will be worth your time, effort and money. Every day, I counsel 7 to 10 clients across the United States about the possibility of negotiating relief with their lenders. Of these 7 to 10 people, only 33% actually pre-qualify to open a loss mitigation case. In hopes to help you better classify which statistical group you fall under, let me give you a couple examples of the other 66.666% who DO NOT qualify:

Disqualification Case 1: A person brings home $5000/mo. She owes $500,000 on her mortgage but her home is worth only $250,000. Her adjustable rate mortgage payment is now $3600, including property taxes and insurance. Her personal budget, including food, utilities, and gasoline add up to an additional $2000. She has savings account reserves of $20,000. She has never been late. Up until now, she has made every effort to do the right thing and keep timely on her payments. She is clearly negative $600 per month and most certainly does not like the idea of taking money out of her savings account to cover the difference - especially on a home that is worth 50% less than what she presently owes. She seeks assistance through a short refinance, so she can re-gain equity in her home and make her payment more affordable.

Assessment: Can she do a short refinance? Unfortunately at this time, NO. In order for a short refinance to happen, her lender must agree to accept less than what they are owed. Why will the lender most likely not agree to accept a short payoff? Although it may not be fair, the harsh reality is that lending institutions must first act in the best interests of their investors, where the borrower's financial well being is secondary. Before they would even consider reducing her loan balance and realizing a quarter of a million dollar loss, she would need to prove that the lender will face imminent near-term foreclosure if the lender should decide to do nothing. In her case, if the lender decides not to accept a short payoff, then she will likely continue to make payments until her savings account completely depletes over the next 2.7 years; she will not foreclose in the short term; and her credit will remain unblemished. You might think she can easily walk away from the home at any point in time, thereby making foreclosure quite imminent for the lender. But in this case, at this point in time, the lender will take that chance and hope that she is more concerned about maintaining her good credit than her concerns of paying on her devalued property. In the lender's eyes, she can make the payments for now, and the situation does not YET warrant the lender to take an immediate financial loss .

Disqualification Case 2: A man has been laid off from his job due to the ailing economy. He can no longer make the $2000 mortgage payment on his home that is now worth 25% less than the mortgage balance. After all he has suffered financially, he does not want to lose his home. He seeks assistance from the lender, asking them to reduce the principal balance and interest rate, so he can consider accepting jobs that might pay him less than what he was making before.

Assessment: Sadly, the lender will opt to accelerate foreclosure proceedings, given that he cannot prove to pay the mortgage, even if they are to modify the loan. Although the lender would lose money by foreclosing, it does not makes sense for them to delay what they see is the inevitable.

Disqualification Case 3: A person was sold a negative amortization mortgage he did not understand. 5 months ago, his barely affordable payment ballooned to an amount more than DOUBLE what he paid before. This happens when the mortgage of negam note must "recast", re-amortizing the loan to require principal and interest payments over the remaining 30yr term. Because he purchased the home 7 years ago, he does have *some* equity in it, just not enough to refinance. He seeks relief from the lender, for them to reset the mortgage payment back to the minimum amount prior to the adjustment.

Assessment: A modification of terms would only result in a faster rate of negative amortization and increase the likelihood of foreclosure in the near future. In this situation, the lender would likely foreclose on the property, given that they can be "whole" after selling the home at auction.

In each of these cases, the homeowners do not deserve to lose their homes. It is certainly not the borrowers' fault that they have fallen victim of the housing economy and can no longer afford to keep up. The "right" thing for their lenders to do is to accept loss and do whatever it takes to make their loans more affordable. However, what needs to be learned here is that lending is a FOR-profit business. Lenders will help their borrowers only if there is a real threat of foreclosure AND if they will lose more money through foreclosure. Otherwise, they are more likely to negotiate "catch-up" payments for delinquent borrowers, if anything at all. Hopefully this greedy corporate rationale will change through future legislation and continued housing rescue efforts by the Feds.

After reviewing the 3 cases above, you might think lenders are absolutely unwilling to help in any circumstance. On the contrary, lenders WILL adjust terms and sometimes write down balances if a borrower can prove with documented evidence that it makes more financial sense to do so. Let's make some key changes to the scenarios above and see how these changes shift leverage to the borrowers' favor:

Case 1 Revised: Let's alter the woman's situation slightly to a scenario where she has now become late, due to running out of cash reserves in her savings account. Additionally, her adjustable rate mortgage has now increased her payment to $4000 from $3600/mo. Having no cash on hand to cover the shortage from her pay, she has now had no other choice but to go delinquent. She faces imminent foreclosure, unless her lender takes action to prevent it.

Re-Assessment: Now faced with a decision to foreclose or modify, the lender must determine which choice results in the least degree of loss to their investors. In this case the cost of foreclosure, reconditioning the home for resale, paying commission fees to real estate agents, and the closing costs of sale would net a far less amount to the lender, than accepting a short payoff from a new lender (a.k.a short refinance). So long as she can qualify for a new refinance loan, all the existing lender must consider is the expected net payoff. Now that she has mortgage lates on her credit, unfortunately she cannot qualify for a traditional FHA loan. However, she may be an ideal candidate for a short refinance through the FHA bailout plan, designed to refinance severely delinquent borrowers out of troubled loans. For the lender, accepting a short payoff through FHA would mean that they would have to forgive the difference of their existing balance *plus* an additional 10%. If the outstanding loan balance is $500,000 with a present market value of $250,000, the lender would realize a net loss of roughly $275,000. If the lender chooses to accept a short payoff, they would get $225,000 NOW and could immediately reallocate these funds to guaranteed loans instead. They could possibly get an equivalent amount through foreclosure, but they would have to wait an indefinite period of time before they could resell the home. Once they do the math, it is likely they will see that an FHA short payoff will yield the lowest net loss to their investors. [The whole purpose of negotiation is to mitigate or minimize the loss to the lender, hence the name "loss mitigation."] Notice the decision to accept the short payoff has very little to do with the lender's desire to offer "help."

Case 2 Revised: Now let's revisit the man who was laid off from his job. Consider a situation where he is able to get himself back on his feet with a new employer. He now has slightly less pay but works at a stable full-time job nonetheless. His reduced income will not be enough to support the present mortgage payment on the home, and he has now gone several months behind.

Re-Assessment: Faced with imminent foreclosure, the lender must decide if a loan workout will be more favorable. He can now prove that he is financially capable of making a reduced payment. With the desire to remain in the home, he will commit to making the payment if the lender will either reduce the rate/balance or accept a short payoff - again through the FHA bailout plan. The decision to modify the existing loan with lower payment terms or permitting a short refinance is up to the lender to make. It is not likely the lender would opt to foreclose, due to the significant disparity between the mortgage and the value. Foreclosure would result in a greater net loss to their investors, so a loan workout of some sort makes better business sense. But a good loss mitigation agency should present a strong case for the short refi, as it is in the best financial interests of the borrower.

Case 3 Revised: For the person with the negative amortization note, it is only a matter of time before payments become completely unaffordable. Typically, a negam borrower has 2.5 to 4 years before the recast point is reached. [For World Savings or Wachovia negams, their recast point can be 5-7 years.] Recalling the gentleman who went late *after* his negam payment ballooned, let's assume he seeks help before this happens AND his home is upside down by 50% (meaning the home is worth 50% of his total mortgage balance).

Re-Assessment: People in this situation actually have a strong chance at short refinancing their home, without having to be late on their present mortgage. There are several arguments to support a lender's decision to do this:

• First, the borrower has gone negative due to his inability to afford the interest only or principal and interest payment. If a lender modified this loan without adjusting the balance, it would result in a new payment that is substantially higher than the one he has now. This would solve nothing. Only a modification that results in a balance write down will yield an affordable payment for this borrower. In my experience, I have seen more lenders willing to accept short payoffs than they would be willing to reduce the balance on the existing note.
• Second, it would not be wise for a lender to offer a modification that allowed for a mere extension to his minimum negam payment, due to the fact that his balance will only continue to grow - increasing the likelihood of foreclosure again in the near future.
• Third, if the lender simply opts to do nothing and allows for his loan to recast, then he will most certainly foreclose. This would result in the lender having to wait 6 months before recapturing the property and having to sell it at a price possibly lower than it is today. If the lender accepts a short payoff now, the borrower with untarnished credit can obtain a traditional FHA loan up to 97% of the home's present value, and refinance out of this troublesome loan. Compared to accepting a short payoff under the new FHA bailout terms, the lender would have to lower the payoff amount to the equivalent of 90% of the home's market value. Remember, FHA bailout loans will require that lenders write down the balance to market value PLUS 10%. From a lender's standpoint, the loss will be 7% greater if they wait until the borrower goes delinquent and has no other choice but to take out an FHA bailout loan.

These are only examples but one could easily find herself in one of these situations. Please understand that the expected outcome can vary, depending on the lender's position on how they are handling their troubled loans. One very important thing to remember, is that no matter how compelling one's case may be for a loan modification or balance write down, the lender makes the final decision to change terms. You will for this reason want to take on the services of a loss mitigation agency you can trust, that they will negotiate the best result for you - NOT the lender. In trying to determine your own chances at getting relief from your lender, consider our agency's qualifying guidelines:

“The current Homeowner has to show within 90 days (possibly longer) a documentable unaffordable change in the terms of the mortgage and/or the homeowner has documentable circumstances that indicates an increase in expenses or decrease in income, which without aid, there would be imminent foreclosure."

“The delinquent Homeowner has to show a documentable unaffordable change in the terms of the mortgage and/or an unavoidable circumstances that caused a temporary or permanent increase in expenses or decrease in income, which without aid, there would be imminent foreclosure, and with aid will result in an affordable retention program, which demonstrate continued homeownership or will result in a transition to more affordable housing and avoid foreclosure, through a non-retention program.”

As always, you are welcome to contact me directly to hear my assessment of your own unique situation, and how I think a lender will choose to resolve it. Take good care of your home and family. - randymiguel@gmail.com