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In the simplest of terms, a loan modification is a direct response to a borrower's inability to repay a mortgage or home loan. Although a relatively new term for many first-time homeowners, loan modifications are steadily on the rise as many homeowners steadily wake up to the very real possibility of a foreclosure. Home foreclosures in America hit an all-time high in 2009, and even after 7 years, the trends has reduced but not gone down as many people would like. Higher interest rates and a slowdown in the economy are to be blamed, and choosing a loan modification is the only real chance for many to save their homes.
Most loan modifications generally involve a reduction in the interest rate, principal balance, or an extension of the loan term. In some cases, it can also be a combination of all three. At the same time, while loan modifications help homeowners, the question that arises is how is it important for mortgage lenders?
The simplest reason as to why lenders are open to modifying a loan is because it helps them save money. Money which otherwise would have been lost if a particular house they financed went into foreclosure. Instead, with the help of a modification, they can still hope to receive back the principal amount and in some cases, lesser interest, with the borrower being able to pay at the new rates. Therefore a loan modification is a win-win situation for both borrowers and lenders, as people get to keep their houses, and lenders get their monthly payments.
At the same time, while a loan modification is fast becoming the go-to solution for borrowers risked with foreclosure, lenders are also striving hard to reduce re-defaults with the help of timely, accurate, and prudent underwriting.
The importance of loan modification underwriting cannot be denied, as the underwriters are the first line of defense against unscrupulous borrowers and are, by all means, the real estate detectives no one knows about.
An underwriters' job is to make sure that a borrower represents himself and his finances truthfully and accurately, and find out if any false claims or documentation have been submitted. On a general basis, an underwriter's standard is much higher than loan pre-qualification requirements, as they are one of the few key decision makers who can approve, suspend, or decline a mortgage application.
The basic tenets of efficient underwriting are the three C's, namely -
Capacity deals with a borrower's ability to pay the modified mortgage on time, and includes an in-depth appraisal of their debt-to-income ratio, spare cash reserves, salary, loan modification program they want to go for and more. Knowing a person's capacity helps underwriters decide whether they can pay off a modified loan or not, whether it is interest-only, fixed-rate mortgage, or a cash-out refinancing option.
Credit reputation, on the other hand, helps underwriters check borrowers past credit history, including previous loans, bankruptcies, foreclosures, etc. and again helps them check the viability of a person to pay off a loan successfully. Even previous non-housing related delinquencies are taken into account in order to arrive at a proper credit reputation.
Finally, we are left with Collateral, which basically deals with a borrower's loan-to-value ratio, type of property, down payment they are willing to provide, property use, etc. In all cases, underwriters minutely examine the details of the borrower so as to understand the exact level of layered risk that is associated with each loan modification application.
The standardized process of underwriting loan modifications include the following steps -
Throughout the procedure, the loan modification underwriter also makes use of the NPV (net present value) test to compare the total NPV of cash flow, with and without mortgage modification. If positive for the lender, a modification approval can be easily granted if the other conditions are met as well.
By now we have been able to establish the importance of loan modification underwriting. At the same time, increasing attrition and more work pressure have led to a significant decline in the number of qualified underwriters. In fact, some estimates suggest that there is more than a 40-50% shortfall in good underwriting talent across the USA alone. In such cases, outsourcing the underwriting tasks can not only help lenders service their customers more effectively, but also allow them to save big on costs!
Some of the benefits of outsourcing loan modification underwriting include -
At FWS, we focus on the strength of our underwriting and quality control processes, and with 11 years of experience in providing high-quality mortgage services, we can help improve the quality of loan modifications approved in your business, while significantly reducing the costly impact of re-defaults.
We have worked with countless Fortune 500 companies, and have enabled them to foster and build long-term consumer confidence in their offerings while ably supporting their backend. Read our customer testimonials to know more about how we can bring about a positive change in your business with the help of our time-tested mortgage outsourcing process.
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