4th Mar 2014

While rare, modifications for jumbo mortgages—loans above $417,000 in most markets, and $625,500 in pricier markets—remain an option for homeowners who can’t keep up with their payments.

Modifications typically change loan terms so borrowers have lower monthly payments, helping those delinquent on their loan or facing imminent default. Many large banks have homeowner assistance programs, and jumbo borrowers may apply for modifications through them.

The reasons for modifying a loan are varied. Common factors include a borrower who is making less income or no longer lives in the home. For those whole can’t refinance, modification is the next step before short sale or foreclosure.

Jumbo-loans modifications are making up a smaller share of overall modification activity. Jumbo loans accounted for 6.7% of all modifications in November 2013, down from 12.1% in November 2012. In August 2009, the rate was at 18.3%.

Some jumbo loans can be modified through the Home Affordable Modification Program, created by the Treasury Department and the Department of Housing and Urban Development.

HAMP helps lower monthly payments, extend loan terms or, in some cases, lower the principal.

The program covers mortgages on a primary residence issued on or before Jan.1, 2009, with an unpaid principal balance up to $729,750; higher limits exist for multiunit properties. Borrowers with loans above the limits must work out modification terms privately, in cooperation with a lender or servicer.While Banks and servicers set up modifications, the terms are at the discretion of the investor if the loan is securitized. Guidelines are different from investor to investor.

Modification may not be a bank’s first choice, but it is better than the last- if the costs make sense. Modifications aren’t always easy to obtain, and borrowers should expect a large pile of paperwork.

HAMP guidelines call for a “waterfall modification”. The first step that servicers take for homeowners who are delinquent or close to default is to capitalize all outstanding balances—add any outstanding taxes or fees to the loan; after that, the interest rate is reduced, with a floor of 2%, until the borrower’s monthly mortgage debt- to income ratio is reduced to 31% or less. If that ratio isn’t met, they may extend the terms out as far as 40 years. The final step is principal forbearance.

Industry members believe that modifications for jumbo loans will be less common going forward, as property values rise and the delinquency rates go down.

Other scenarios to consider:Investment Properties: Modifications are available for investment properties. Borrowers should consult with their lenders for options.

Foreclosure option: In rare cases, it may be less expensive for investors if there is a foreclose rather than a modification.

Modified from: Davis, Lisa. “A Second Act for Loans.” Wall Journal 28 Feb. 2014: M5. pag. Print.

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