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"The median monthly payment reduction for borrowers enrolled in
the (HAMP) program is $522" - DSnews.com
HAMP Loan Modification and the Waterfall Effect
Many people wonder what is the rhyme and reason behind these HAMP modifications? What does the lender do to modify the terms into something better than what I already have? How do they accomplish this?
The answer to this question is called the Waterfall technique. Basically, when lenders, servicers and investors decide to modify a loan, their goal is to improve the loan to help the borrower’s ability to afford it while also giving up as little as possible. They essentially want to try and recoup as much of their original investment as they can which is why you don’t see banks simply jumping at the opportunity to reduce borrower’s principle. And if you think about it, it makes sense. If you had a loan out to someone and you had to make some concessions in order for them to be able to pay it back wouldn’t you want to still recoup as much of that loan as possible. Wouldn’t you strive to find that perfect place where you help just enough for payments to begin flowing in again?
This is the way the lenders/investors feel as well. To accomplish this goal they use the waterfall technique. What that waterfall technique describes is the process of changing a loan’s terms in a series of steps. Here is how it works. If a borrower needs just a little bit of payment reduction they may change the loan to a 40 year term. This allows for a lower payment while not giving up any principal or interest. If this is not enough they then move to a reduction in interest. Here they are losing money but at least they are still getting the entire principal back with some interest. Finally, if these are not enough, they move to principal reduction, literally lowering the principal to make the loan perform again.
This is good information to know when discussing loan modification options with your lender.
MAC