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1.2.7 Negotiating a Workout or Modification

In some cases, a workout or loan modification can achieve a result as good as litigation with the expenditure of far less time and money. In other cases, borrowers may not have strong enough claims to pursue a litigation strategy. In either case, advocates should determine whether a workout agreement or loan modification is possible.

Loan modifications may include interest rate reductions, term extensions, capitalization of arrears, and/or principal reduction or forbearance. Shorts sales or deeds in lieu of foreclosure are other possible foreclosure alternatives. Potential workout terms include a forbearance agreement, temporary interest rate reduction, recasting of missed payments, or permanent modification of loan terms. NCLC’s Mortgage Servicing and Loan Modifications (2019), updated at www.nclc.org/library, describes the major loss mitigation and loan modification protocols that apply to major categories of loans. These include those developed by Fannie Mae and Freddie Mac (Mortgage Servicing and Loan Modifications Ch. 7 (2019), updated at www.nclc.org/library), the Federal Housing Administration (Mortgage Servicing and Loan Modifications Ch. 8 (2019), updated at www.nclc.org/library), the Department of Veterans Affairs and the Rural Housing Service (Mortgage Servicing and Loan Modifications Ch. 9 (2019), updated at www.nclc.org/library), and the expired modification programs under HAMP (Mortgage Servicing and Loan Modifications Ch. 6 (2019), updated at www.nclc.org/library). The failure of the servicer to consider the borrower for foreclosure alternatives may give rise to various legal claims. See Mortgage Servicing and Loan Modifications Ch. 10 (2019), updated at www.nclc.org/library.

If no workout agreement is possible, an advocate should determine the following prior to foreclosure:

  • Was the homeowner properly considered for a loan modification program or other loss mitigation alternatives? Chapter 6, infra, discusses defenses to foreclosure based on failure to consider loss mitigation options for government-insured mortgages. Section 5.13, infra, discusses the role of loss mitigation reviews in mediation and conferences programs. NCLC’s Mortgage Servicing and Loan Modifications (2019), updated at www.nclc.org/library, discusses general litigation strategies against servicers that mishandle loss mitigation reviews.
  • Did the servicer fail to convert the borrower from a trial plan to a permanent loan modification? See Mortgage Servicing and Loan Modifications §§ 5.3 to 5.8 (2019), updated at www.nclc.org/library (discussing various state law UDAP, contract, and tort liability claims).
  • Does the homeowner have equity and is the homeowner willing to sell the property before foreclosure to preserve its equity? See Mortgage Servicing and Loan Modifications § 6.2.5 (2019), updated at www.nclc.org/library.
  • Is the homeowner able to refinance with a different lender at a lower interest rate? See Mortgage Servicing and Loan Modifications § 6.3.2 (2019), updated at www.nclc.org/library.
  • Does the homeowner qualify for a mortgage assistance program? Some states have programs that provide loans to homeowners to make mortgage payments if they meet certain eligibility requirements. See Mortgage Servicing and Loan Modifications § 6.3.3 (2019), updated at www.nclc.org/library.