Last fall, we refinanced our house. Our 5/1 mortgage product was tied to 1 year LIBOR and I was more or less happy with my rate so I didn’t think much about it after we closed. In February, I noticed LIBOR had fallen sharply, about 0.75%, and called my bank. I had no early withdrawal penalty and I asked for a loan modification, having never requested one before. I figured it would be easier and cheaper than a refinance.
A mortgage modification contains the exact same terms as the original refinance, but with a different (lower) mortgage rate and of course, different (lower) mortgage payments than agreed to at the original closing.
Apparently I was the first person to request a modification from the bank on this product. A week of getting their legals ducks in a row and we were ready to do the paperwork. The rate fell another .25% and as a courtesy, they locked me in the day before they increased rate. We end up with a mortgage a full 1% below what we had before. Our only cost was a $500 fee and an agreement not to modify that same mortgage again.
Sheila Bair, one of the most articulate and outspoken FDIC chairs in recent memory makes the case for mortgage loan modifications. I am guessing that many consumers would not think of this option, nor would it be advertised by mortgage lenders because it reduces the spread (profit) on the mortgage.
One of the reasons stated for the slow pace of loan modifications is that some servicers remain concerned about the potential for legal liability based on those modifications. Given the flexibility provided in most PSAs, it seems unlikely that a servicer engaging in loan modifications to avoid greater losses through foreclosure will be legally liable to investors. In addition, loan modifications that avoid greater foreclosure losses are consistent with industry standards embodied in the principles and guidance provided to servicers by ASF, which should provide an additional degree of protection from legal liability. In fact, servicers who take no action to address upcoming unaffordable resets in their loan portfolios and choose to rely on the traditional loan-by-loan process leading to foreclosure probably run a greater risk of legal liability to investors for their failure to take steps to limit losses to the loan pool as a whole.