Knowledge is Power (and can save you misery!)

Last week, I was reminded once again how important
it is for clients to know the features of the home loans
that they receive.

I had helped a client about 6 years ago with a new
loan. These were people I had known and helped
many times for the last 28 years. They were
important friends and clients for me.

The loan I had done for them was a 30-year fixed
rate loan with a rate of 6.875%. About a year later,
that lender came to my client and offered them a
modification of the loan which reduced the interest
rate.

As part of this modification, the lender changed the
loan from a 30-year fixed rate to a 5-year balloon
payment loan. This means that at the end of the
five year period that the entire loan balance is due,
and that the client either needs to pay it in full
from their cash assets, or arrange for another
loan to refinance it.

My borrower is self-employed and their financial
statements did not support a refinance at this
time. Of course, since underwriting has changed
so much in the last three years, this borrower
could have obtained a loan previously, but not
in this environment.

Things were looking bleak for helping them save
their home. If they did not arrive at a solution,
the lender would be in a position to foreclose on
them for non-payment of the balloon payment
loan.

As part of my consultation with them, since I
could not help with a new loan, I offered to
review their loan documents to see what was
possible.

The silver lining was that they did receive an
offer from the existing lender for another
modification. There was a number of stipulations
for qualifying for this. They included that the
home had to be their primary residence (it was),
they could not have been late on any payment
in the last 12 months by more than 30 days
(they were not late) and that their could not
be any secondary financing on the home (they
had a line of credit).

There was a footnote to this last condition. It
said that it would not apply if their first loan
modification documents did not also stipulate
those terms.

So, we went through their stack of loan papers.
Most of you know how daunting that can be
for anyone who is not used to that confusing
paperwork. The good thing is that my client
had all of those papers in an easily-accessible
place.

I found the original note and an addendum to
the note. I found the clauses that spelled out
the conditions that had to be in place for a
future modification. These closely paralleled
the letter that they had received.

The good news was that the note did not say
that they could not have secondary financing.
The clause in the letter that we thought would
defeat their opportunity to modify the loan did
not exist in the note.

I made sure that the borrower had the important
pages and clauses well-marked for when he
would have his discussion with the lenders'
representative. They agreed that they would
call me after they had discussed it the lender.

The next day I got the call. They said that they
were OK'd for new modification and that they
were offered a rate of 4.75%. I told them to
move quickly to get the terms finalized.

But, the call to the lender was not that smooth.
When they called, the lender's representative
said that they did not qualify because they had
secondary financing on the home. Because we
had taken the time to familiarize ourselves with
the terms of the loan, the borrower knew what
to do next.

He insisted that the representative look at his
note from the modification. It took a few minutes
but the representative located a copy and they
went through it together. The representative
was able to agree that the borrower was correct
and that they were eligible for the modification.

It was really gratifying to help them find a
solution. I was happy to help my friends by
educating them and giving them the ammunition
to get what they deserved.

I want to leave you with a couple of important
thoughts.

1. You need to know what you are getting when
you obtain your loan. My friends did not
realize that the modification that provided
the low interest rate from 5 years ago also
included a balloon payment clause. This could
have been catastrophic for them.

2. If you are not working with someone who has
earned your trust, you have to educate yourself
and be smarter than the people you are dealing
with. The lender representative could have put
my friends in a terrible position by not researching
things properly. If they had accepted the first "no"
they could have been on a path leading to fore-
closure.

3. Surround yourself with people you can trust.
I have built my career over the last 33 years by
listening to my clients, educating them, and telling
them the truth. It works for me and it works for
my clients.