What is a Renegotiated Loan?
A renegotiated loan is a loan, such as a home mortgage, that has been modified by the lender prior to its full repayment. A renegotiated loan is intended to make it easier for the borrower to keep up with future payments and to ensure that the lender will eventually be paid back.
How a Renegotiated Loan Works
In a renegotiated loan, all parties agree to modify the loan's original terms. 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 their monthly payments and expect to have further difficulty making those 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 of their future monthly payments on time. However, it is usually better than defaulting on the loan.
[Important: Most states have mediation programs to help borrowers renegotiate their loans if their lenders aren't cooperative.]
To initiate a renegotiation, the borrower should contact the lender directly. Banks and other lenders are often motivated to renegotiate because that's a generally a preferable option to foreclosure, due to the costs and risks involved in that process and the fact that the renegotiated loan will provide them with at least some cash flow. Lenders also tend not to want to take possession of physical properties like homes, which require regular upkeep and may take a long time to sell. If the borrower is not successful in renegotiating a loan directly with the lender, most states offer a mediation program under which the lender must meet with the homeowner in front of a court-appointed official to attempt to resolve the matter.
History of Renegotiated Loans
In the United States, loan modification programs, such as renegotiated loans, have a long history, going back to at least the Great Depression. The Home Owners’ Loan Corporation (HOLC) was founded in 1933 under President Franklin D. Roosevelt to assist in refinancing of mortgages in danger of foreclosure. The agency sold bonds to investors and then used the proceeds to purchase troubled loans from lenders. Typically, this resulted in a combination of an extension of the loan's life and a reduced interest rate for the homeowner. Between 1933 and 1935, the HOLC purchased approximately one million loans and had a foreclosure rate of about 20 percent – meaning that the large majority of borrowers were able to make their mortgage payments and keep their homes. 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 was terminated in 2016 and has been replaced by options such as the Fannie Mae Flex Modification program.