Loan Modification Questions: Escrow advances, Partial Claims and Interest Rates.

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Loan modifications are complex animals not because the concept behind them is complicated but because of all the elements that compose it and the various options and permutations of these options that must be decided. The jargon linked to loan modifications can also make it a challenge to understand the instructions you read in the literature.

This series of articles “Loan Modification Questions” is designed to clarify some of the most important questions you can ask yourself about loan modifications as well as busting some jargon by using plain English to explain what your options are.

Loan Modifications are based on a simple concept to renegotiate a loan or mortgage in order to provide some advantage or benefit to one or both of the parties. The loan modification the government is now backing is designed to allow struggling borrowers that have some form of income and can pay their mortgage if their monthly payments are reduced, their late fees are waivered or some other modification is carried out.

One of the ways this is carried out is to capitalize or include in the loan modification costs or fees the borrower must currently pay on top of his monthly payments.

Can a mortgagee capitalize an escrow advance for Homeowner´s Association fees when using a loan modification option?
The answer is yes. HUD Handbook 4330.1 REV-5, Paragraph 2-1, Section B under Escrow Obligations states: Mortgagees must also escrow fund for those items which, if not paid, would create liens on the property positioned ahead of the FHA insured mortgage.

In other words the FHA insured mortgage must have first rights on the loans security, the house. For this to happen pending fees and costs must be capitalized into the mortgage.

Interest Rates.
One of the reasons the government is pushing for loan modifications is so that homeowners whose homes have dropped in value can benefit from the current lower interest rates. Is there a new basis interest rate which mortgagees may assess when completing a Loan Modification?
The answer is again yes. Mortgage Letter 2008-21 explains that the new basis interest rate is 200 points above the monthly average yield on U.S Treasury Securities adjusted to a constant maturity of 10 years. This links the interest rate applicable to loan modifications to Treasury Securities.
An important issue when applying for a loan modification is that the loan modified is the primary loan. Will HUD subordinate a Partial Claim, if a mortgagor (the borrower) subsequently defaults and qualifies for a loan modification?
Yes, HUD will subordinate a Partial Claim if a mortgagor defaults and qualifies for a Loan Modification.
These are just a few of the questions you are probably dealing with if you are searching for a suitable loan modification. The best advice is to ask for free advice from a government institution and ask what your options are.