Posted by Art_MD on 11/16/07 10:40am
Msg #221612

Modification - something wrong ?? No spousal RTC

Did a quick modification last week where they were adjusting the amount of the mortgage to cover late missed payments. Added about $7,500 to note amount.

Here's the problem..

Husband and wife on title, husband on note.
No RTC for spouse.
No RTC for borrower.

Would think that if the spouse finds out down the road about the modification (closing done at a restaurant - only husband present), there could be some legal issues.

Not my job to question papers or legality

Art

Reply by Linda_H/FL on 11/16/07 10:42am
Msg #221613

Not sure a modification is subject to RTC - we modified our mortgage down a few months ago -no RTC - HOWEVER, both my husband and I had to sign mod as we were both on title.

Reply by Phillip/TX on 11/16/07 10:48am
Msg #221614

Modification has no RTC, you are simply modifying the existing loan and documents. The DOT does not change.

Reply by Pat/IL on 11/16/07 11:10am
Msg #221621

From Reg Z:
"47 For purposes of this section, the addition to an existing obligation of a security interest in a consumer's principal dwelling is a transaction. The right of rescission applies only to the addition of the security interest and not the existing obligation. The creditor shall deliver the notice required by paragraph (b) of this section but need not deliver new material disclosures. Delivery of the required notice shall begin the rescission period. "

To me, in my nonlawyerly, semi-educated opinion, this would suggest that "addition of security interest" in a modification is subject to right of rescission. However, considering the small amount in question here, I would guess that the additional amount added to the principal did not exceed the original secured amount, and thus not subject to RTC.

Reply by Phillip/TX on 11/16/07 11:20am
Msg #221623

That is typical of the Loan Mod to not exceed original loan. n/m

Reply by Pat/IL on 11/16/07 11:47am
Msg #221633

Re: I disagree.

In my experience, modifications nearly always have increased the note amount or credit limit and/or lengthened the maturity date. Frankly, I don't even know why they would even bother with a modification in this case. Interest and penalties can be added to the principal without a modification.

I would think there would need to be some change in terms. If the change in terms is in the borrower's favor, I guess there would be no need, again, for RTC. My opinion only, take it or leave it.

Reply by Art_MD on 11/16/07 11:57am
Msg #221636

Re: I disagree.

Little more info...

Forclosure procedures had been started. I quess this was the only way he could get out of it.
The way I see it is that the wife's equity in the house was being decreased and she didn't know about it.

What if...

home value = $600,000
loan amount = $500,000
modified amount $550,000

Wife has lost $25,000 of her equity and doesn't even know it. For all she know, hubby could be taking her equity to support some "sweet young thing"

Art

Reply by MikeC/NY on 11/16/07 4:07pm
Msg #221713

You're not modifying the loan amount in a case like this

If you're going to change the amount borrowed, you need a new note and a new mortgage (or DOT, for those states that don't have mortgages).

What they're doing here is tacking the accrued interest and penalties (and possibly legal fees) onto the back end of the loan; that's money that should have been paid, but wasn't. The amount borrowed doesn't change, but the amount remaining to be paid back does. In a sense, they're giving back some of the principal they previously paid off in exchange for being able to keep their house.

I don't think your statement that the wife "has lost $25,000 of her equity and doesn't even know it" is accurate. Their equity in the home has been reduced, but there's a big difference between fighting a foreclosure and refinancing to take equity out - unless the husband was spending the mortgage payments on some sweet young thing, in which case he has other problems to deal with....

I also don't think the RTC applies in this situation, because they're not refinancing or consolidating - they're just modifying the terms of an existing loan.

Reply by Pat/IL on 11/16/07 4:38pm
Msg #221715

Re: You're not modifying the loan amount in a case like this

I can't speak for New York or Texas, but around here, we see modifications with increases in the loan amounts all the time. In addition, I have in fron of me an offer to increase my existing secured credit line threefold - by modification of the existing credit agreement.

Reply by MikeC/NY on 11/16/07 5:45pm
Msg #221725

Re: You're not modifying the loan amount in a case like this

You're talking about the increasing a line of credit - you haven't borrowed the money yet and the amount of the "loan" is fluid. There's a huge difference between a line of credit and a loan - who would sign a note obligating them to pay back $150K when they have no idea how much of that they will actually draw?

In the case of a modification to avoid foreclosure (which is what we're talking about here), you're not changing the amount of the loan - you're modifying the amount remaining to be paid, and possibly the terms of the loan (additional years, interest rate, etc). If I borrow $500K from you, fail to pay principal and interest for 6 or 7 months, and then agree to make those payments at a later date, did I borrow more from you? No, I've just extended the time it will take me to pay you back and have tacked on some penalties for not paying on time. The loan amount remains the same.

Reply by Pat/IL on 11/17/07 3:52pm
Msg #221834

Re: You're not modifying the loan amount in a case like this

Mike,
The example involving my own line of credit is just one example, which I offered to illustrate my point, in response to your assertion that "If you're going to change the amount borrowed, you need a new note and a new mortgage (or DOT, for those states that don't have mortgages)." My point was that a modification can be used to accomplish an increase in note amount (closed-end mortgage) or credit limit (open-ended mortgage). It was not a response to Art's original question, or his later clarification that the modification's purpose is to avoid foreclosure.

When you increase the credit limit on a secured line of credit, you increase the amount of the lien on the property - whether you draw the entire amount or not is immaterial. The open-ended mortgage secures future advances. Or, the entire credit limit may be drawn in the initial advance. Some lenders will use a modification to increase the credit limit, and thus, the amount of the lien on the property.

A closed-ended mortgage may also be modified to reflect a modified note, showing an increase over the original note amount. It only took looking through 3 or 4 random modifications in the records of the local recorders office to find an example of a note modified to increase both the maturity date and the amount. The original amount borrowed on 12/14/200: $92,000.00. The modification, dated March 29, 2002 modifies the mortgage as follows: "Extend the maturity date to January 25, 2011 securing MODIFIED promissory note in the amount of $122,394.21 dated march 29, 2002" (emphasis added)

Reply by MikeC/NY on 11/17/07 5:13pm
Msg #221841

Re: You're not modifying the loan amount in a case like this

Pat,

I understand what you're saying and I can't argue with you about it - I think we're talking about two different things, because all I was addressing was Art's point about the foreclosure.

I'll retract what I said about requiring a new note and a new mortgage - that's the way it works here, but I should have realized that other states may have other ways of doing it. Mea culpa.

I still think that in the case of a mod to avoid foreclosure, there's no requirement for an RTC because the amount of the loan hasn't changed. Would you agree with that?

Reply by Pat/IL on 11/17/07 6:04pm
Msg #221845

Re: You're not modifying the loan amount in a case like this

Thanks for the understanding, Mike. I think the confusion came from my not thinking foreclosure in the first couple of posts.

I would not dispute that, in most cases, a modification to avoid foreclosure would probably not require RTC. However, I don't really know enough about how they are handling these to speak of them with any confidence. Maybe there are cases where RTC comes into play. For instance, if they are well into a judicial foreclosure (assuming the lender will even agree to a modification that far along) could the accrued costs, tacked onto the principal, be enough to trigger RTC? I don't know. I am way overthinking this now.

Reply by Linda_H/FL on 11/16/07 12:09pm
Msg #221640

Re: RTC Exemptions

Per Reg Z:

(f) Exempt transactions. The right to rescind does not apply to the following:
(1) A residential mortgage transaction.
(2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer's principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.

Reply by BrendaTx on 11/16/07 12:55pm
Msg #221652

Many times the mod is to change the interest rate only...

Phillip's remarks about "typical" are probably based on his experience and I cannot disagree.

Reply by Pat/IL on 11/16/07 1:31pm
Msg #221672

Re: Many times the mod is to change the interest rate only...

Brenda and Phillip,

That may well be so. As I pointed out, my remarks are based on my experience which, now that you mention it, might be different from yours. The transactions that I see are mainly the ones we are asked to insure. If there is no increase in the note or credit limit, I guess there is no reason to adjust the insured amount. Thus goes another modification that does not require my company's services.

Reply by BrendaTx on 11/16/07 1:57pm
Msg #221683

Good point Pat! n/m

Reply by PAW on 11/16/07 3:39pm
Msg #221706

Q&A from Bankers Online concerning this very issue

by Lucy Griffin, BOL Guru (http://www.bankersonline.com/bio.html#lucy)

Question: If you do a real estate note modification to an existing note, and additional funds are advanced, resulting in a modified loan with a new balance in excess of the outstanding loan balance plus charges for the modification, is this considered a refinance or a modification under Reg Z and RESPA? Are new disclosures necessary, and does rescission apply to money advanced in excess of the outstanding loan balance plus charges related to the modification?

Answer: It is a modification with rescission rights for the amount of the additional balance. The modification -- keeping the old note in place and simply making some modifications to amount and payment schedule -- does not trigger disclosures under TIL or RESPA.

However, that additional amount advanced does trigger rescission as to the new amount. This is contained in 226.23(f) of Regulation Z.

First published on BankersOnline.com 2/11/02