Loan Modifications Terminology
Amortization: The paying off of debt in regular installments over a period of time.
Appraisal: A property valuation issued by a licensed appraiser specifically trained in determining the fair market value of property.
Balloon: An oversized payment due at the end of a amortized loan. In the case of a Principal Forbearance a balloon is the amount of the Principal not included in the amortization. Another instance of balloon payments in modifications is when an investor agrees to amortize the new UPB over a period of time greater than the Remaining Term. This practice of keeping the Remaining Term the same but allowing for extended amortization allows the investor to lower a borrower’s monthly payment yet still allows the investor to recover his principal investment within the original time frame set forth in the original loan docs. For example, if a borrower has 25 years left on a loan at the time a loan modification is granted and, in order to keep the payment low for the borrower, the investor allowed for a 40 year amortization, any amounts not paid on the principal balance will be due and payable at the end of 25 years. Many borrowers are scared of this method of modification, however, once it is properly explained most do not mind it all because it is effective at accomplishing the overall goal of lowering the borrower’s monthly payments.
BPO: Broker Price Opinion used to determine the FMV of the property. A BPO is issued by a licensed real estate agent or broker retained by the lender for the specific purpose of determining a property’s value.
Escrow: When a borrower pays property taxes and hazard insurance through the lender the total amount of the yearly property taxes and hazard Insurance are divided by 12 and added to the principal and interest payment made by the borrower each month. This monthly payment is referred to as an Escrow. These monthly payments are held in an account by the lender and used to pay for the borrower’s property tax and insurance payments as they come due.
Escrow Shortage: When a lender has not collected enough money from the borrower to pay the property taxes and hazard insurance when due. The amount that the lender is short is called the escrow shortage.
Exterior BPO: Broker Price Opinion based solely on the exterior condition of the property.
FMV: Fair Market Value is the value of the property based on a free market analysis not subject to any subjective conditions.
Gross Income: Pre-tax wages earned by the borrower.
Imminent Default: The status of the borrower’s default where the borrower is either current or less than two (2) months late at the time that a loan modification application is reviewed by a lender.
Investor: Many loans are not actually owned by the lender that the borrower makes payments to but merely serviced by the lender on behalf of the actual owner of the loan. Examples of investors are Fannie Mae, Freddie Mac, Bank of New York Mellon, ING, Ginnie Mae, etc.
Monthly Hazard Insurance: The monthly cost of a borrower’s yearly hazard insurance represented by dividing the annual premium by 12 months.
Net Income: The amount of money that a borrower actually takes home each pay period after all taxes and deductions are taken out.
NOD/Notice of Default: A notification given to a borrower stating that the borrower has not made their payments by the predetermined deadline, or is otherwise in default on the mortgage contract.
NPV: Net Present Value. is an extremely important test for any loan modification program. NPV has the final say on whether or not a homeowner will obtain a loan modification.
Property Value: The current market value of your property.
Principal: The amount of money loaned to a borrower by a lender.
Principal Forbearance/Deferment: The amount of principal an investor is willing to place at the end of the amortization term that will eventually be paid as a balloon payment. The borrower is not charged interest and does not make payments on this amount until the term of the loan has expired.
Principal Reduction/Forgiveness: The amount of principal that an investor is willing to forgive/reduce under a loan modification agreement. Product Before Modification: The type of loan the borrower held prior to applying for a loan modification. The type of loan could be a fixed rate, adjustable, step rate, negative amortization, etc.
Unpaid Principal Balance of the Proposed Modification: The new proposed balance of a borrower’s loan being considered for a loan modification. The new proposed balance might be different than the UPB because it might include amounts owed by the borrower for missed payments and unpaid expenses.