There are two kinds of mortgage loans in this world — bank owned and investor owned — and the type you have often determines the level of difficulty you face in obtaining a loan modification. A bank-owned mortgage is one that the bank services and owns (the bank is also the investor). An investor-owned mortgage is one that has been repackaged as a mortgage-backed security (MBS) and sold to Wall Street investors or sold on the secondary market as a pool or package of whole loans. A servicer collects and processes the payments, but the servicer does not own the mortgage and can make only limited decisions regarding it.

Modifying a bank-owned mortgage loan is sort of like working out a deal with your local bank in the good old days. Because the bank owns your loan instead of merely servicing it, the bank owners can make a decision without having to consult investors, because they are the investor. While the bank may have a list of eligibility requirements and guidelines regarding standard concessions it’s willing to make, it is more able and apt to make exceptions based on extenuating circumstances. The bank owner can make a case-by-case determination faster than when the servicer must consult a third-party investor.

Modifying an investor-owned loan is more complex, because another layer exists between the mortgagee (the lender) and the mortgagor (the borrower). Instead of the mortgagor dealing directly with the mortgagee, both parties negotiate through an intermediary — typically the servicer representing the mortgagee’s interests. As a result, the servicer has very limited decision-making power. The mortgagee sets the decision-making parameters for the servicer. If the decision falls within what the investor allows, then the servicer can make the decision. But if what’s being requested is outside the pre-established parameters, then the servicer must contact the investor for permission. As you might guess, this can further complicate the process.

Larger banks/servicers are likely to have several loan modification departments or divisions, each of which specializes in a particular third-party investor’s decision-making parameters. This enables them to process applications more quickly and efficiently.

Knowing the party that owns your mortgage loan can give you a strategic advantage in assessing your situation and evaluating your options. Certain investors and their insurers (including FDIC, Fannie Mae, Freddie Mac, FHA, and HUD) are taking a proactive approach to working out non-performing loans and keeping people in their homes. If you are able to determine that your loan is with one of these investors you can gain a better sense of available programs and options available for your situation. For example if your loan is with IndyMac (taken over by the FDIC), you have a greater chance of obtaining a principal forbearance (assuming you’re eligible).

Principal Forbearance

If your home is worth considerably less than the unpaid balance [UPB] (the amount you owe on it), a principal forbearance may be an attractive option. Monthly payments are recalculated on the estimated market value of the property rather than on the UPB, which can significantly reduce the monthly payment. You still must pay back the UPB in full, but you don’t have to pay the difference between the UPB and your home’s current market value until you sell the home or refinance.

As another example, suppose you’re dealing with a lender that’s notorious for presenting terrible loan modification offers. You then know that negotiations are likely to be complicated and you may need to have one or more contingency plans in place – for example, refinancing with another lender or selling your home and starting over.

Unfortunately, discovering the true identity of the mortgagee can be extremely difficult. Some investors take great measures to remain anonymous and may even protect their anonymity in their agreement with the servicer. Ask your servicer, who may or may not tell you. You can also call Fannie Mae or Freddie Mac – if they own the note, they may tell you. Do your best to identify the owner of your mortgage, but don’t knock yourself out trying – knowing is useful but not worth knocking yourself out over.

Warning: Don’t make assumptions based on the reputation or track record of a particular lender or investor. You really have no idea what a lender or investor is ultimately willing to agree to until you ask. If you’re committed to keeping your home and believe that you are eligible for a loan modification, submit your application and invest some time and effort in pursuing this option. Knowing the investor, however, may expedite the process or help you prepare for plan B in the event that the lender/investor rejects your application or makes you an offer you cannot accept.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)