Lenders Ramp Up Modifications

Mortgage companies will become more aggressive in restructuring loans for struggling homeowners, even borrowers that are six months behind in their payments, according to a bankruptcy attorney who works with major lenders and servicers.

Tripp Scott director John Bianco said his clients no longer expect to achieve decent recoveries on sales of foreclosed properties. So now they are voluntarily reaching out to borrowers and modifying the loans to get them back to performing status.

"It is a change of course," Mr. Bianco said. "But you are seeing it out of necessity."

In the next 30 to 60 days, some national outfits will launch pilot programs in Florida and other "hot states," the Tampa attorney said.

If the borrowers are behind in their payments, servicers will "capitalize the arrearage or place it at the back of the loan," Mr. Bianco said. When the arrearage is capitalized, it is added to the principal balance of the loan.

They will offer to extend the term of the loan from 30 years to 40 years to make the payments more affordable and reduce the interest rate, if necessary. They will also offer to convert adjustable loans to fixed-rate mortgages.

"I haven't seen the actual reduction of the balance. But you are going to see that start to happen," he said, because "they would rather have a performing loan."

If the pilots are successful, they will be expanded nationwide.

Mr. Bianco said he could not provide further information about the pilot programs because of confidentiality agreements.

Tripp Scott is developing software for the pilot program to enhance communication with borrowers. The proprietary Web-based programs will provide an interface between lender and borrower and facilitate loan modifications.

Relying on the telephone can be very frustrating for borrowers and servicers, Mr. Bianco said.

"Our clients believe if they can increase communication and the exchange of information that you are going to see an increase in the amount of workouts. I think it will have a major impact," he added.

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