Renegotiated Loan

What is 'Renegotiated Loan'

A renegotiated loan is a loan that has been modified prior to its full repayment to assist the borrower in meeting their repayment obligations.

BREAKING DOWN 'Renegotiated Loan'

Renegotiated loan refers to a loan which all interested parties have agreed to modify in order to allow the borrower to meet their repayment obligations. Modifications can include the interest rate or the length of the loan. In some cases, the rate structure can be modified by changing from a fixed-rate to an adjustable-rate loan or vice versa. Another modification option is the forbearance, or temporary stoppage, of loan payments.

Typically, homeowners can qualify for renegotiation or modification of an existing mortgage if they are ineligible to refinance, are experiencing a long-term hardship such as a disability, or are several months delinquent on monthly payments and expect further difficulty making payments. Borrowers should be aware that a renegotiation of their loan often has an adverse impact on their credit score, even if they make all monthly payments on time.

To initiate a renegotiation, the borrower should contact their lender directly. A lender is often motivated to renegotiate as it is generally a preferable option to foreclosure, due to the costs and risks involved in that process. If the borrower is not successful in renegotiating a loan directly with their lender, most states offer a mediation program under which the lender must meet with the homeowner in front of a court-appointed official.

Federal loan modification programs in the United States

Loan modification programs in the United States date to the aftermath of the Great Depression. The Homeowners’ Loan Corporation (HOLC) was founded in 1933 under president Franklin Roosevelt to assist in refinancing of mortgages in danger of foreclosure. The agency sold bonds to investors and used the proceeds to purchase troubled loans from lenders. Typically, this resulted in a combination of an extension of the loan life and a reduced interest rate for the homeowner. Between 1933 and 1935, the HOLC purchased approximately one million loans with a foreclosure rate of about twenty percent. The agency ceased operation in 1951.

A similar loan modification program was initiated by the federal government in response to the subprime mortgage crisis of 2008. The Home Affordable Modification Program (HAMP) was introduced in 2009 as part of the Troubled Asset Relief Program (TARP). HAMP offered similar relief to the HOLC program, with the added option of principal reduction. The program terminated in 2016 and has been replaced by options such as the Fannie Mae Flex Modification program.