Many restrictions precluded the loan modification from taking-hold.
Most Pooling & Servicing Agreements (P&S) allow for modifications, however, many contain restrictions that preclude or limit same. Changes in the American Securitization Forum (ASF) Guidelines dated June and December 2007 attempted to define and allow modifications without violations of the P&S and the REMIC/Trust regulations. The Hope Now Mortgage Servicer Guidelines of June 9, 2008 also paved the way for further use of modifications. However, as of June 2008 the use of modifications was still not wide-spread. At that time, most loss mitigation efforts took the form of a forbearance or repayment plan resulting in unaffordable monthly borrower payments and high re-default rates. However, changes in the tax regulations in 2008 and 2009 including IRC Section 860 et seq. cleared the way for wide spread use of the residential modification (See Rydstrom Article: Mortgage Modification Safe-Harbors? HAMP, Are We There Yet?)
Only recently did the commercial modifications get the green light for early negotiation or resolution (See Rydstrom Article New Final Regulations Resolve Open Issues for Modifications of Commercial Mortgages Held by REMICs - But Modifications Held by Investment Trusts Remain Unanswered Pending Comments [TD 9463, Rev. Proc. 2009-45, Notice 2009-79]).
Residential Real Estate (Individual Homeowners & Real Estate Investors)
Whether your clients are individuals, or real estate investors, mortgage and debt workouts are a serious problem facing them. Individuals have limited safe harbors to avoid tax and deficiency liability on their personal owner-occupied residences, but investor real estate may expose them to serious tax or deficiency liability.
Additional resources provided by the author
WARNING: Real Estate Investors: Non-owner occupied investment real estate is generally not covered by the government modification programs such as HAMP and legislation covering exclusions from forgiveness of debt. Therefore, real estate investment property may cause taxation and deficiency liability for forgiveness of debt, short sales, deed in lieu of foreclosure (DIL), or foreclosure. The real estate investor should negotiate waiver of liability for any deficiency on all workouts. Taxation is more troublesome (See Reference to Taxation below).