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TimeValue Software Blog

Modification, Restructuring, Forbearance on a Loan

By Martel Pellerin

Modifications and forbearance are hot terms in finance today. Modification is changing the terms on the loan. Forbearance is an agreement where the lender delays their right to exercise foreclosure if the borrower can either catch up to their payment schedule by a certain time or agree to extend the term of the loan.

For both situations, the key for the borrower is to get some relief due to financial difficulties. The key to the lender is to keep their customer in the property, give them some relief, and keep their yield on the loan. How this restructuring is done can make a significant impact on either party.

There are numerous scenarios that we could model but we will show you some relatively simple options and use TValue to restructure these loans to create win/win outcomes if possible.

The first and most common option we have seen so far is a three to six-month payment relief. What does this mean, what are the options, and what is the impact? Payment relief over multiple months is often a good option for both parties. The interest generally continues to accrue and the required payments are added on the back end of the loan by extending the term.

With TValue, payment relief is easy to structure. First from the Configuration tab, set the Compute Method to U.S. Rule. With the loan entered in TValue, click on Expand to display the payments individually. You can then change the appropriate monthly payment amounts to zero. The interest during that time will continue to accrue. Next, click Sort to compress the common payments. Now, you will need to restructure the back end or the maturity date. To do this, put the letter “U” for unknown for the Number on the last line of the series of payments to recalculate the term and TValue will determine the additional payments needed to pay off the loan. You should also write an addendum to the original agreement with the new term.

A second option is to give the modification/forbearance interest free. Relieving the payments should be adequate for most situations but if you agree to make the payments interest free, you will have to start by following the structure in the above example by expanding the cash flows. Then you would do a Rate Change and enter a 0% Rate Change Event prior to the zero-dollar payment and another Rate Change Event back to the stated rate when the zero payments end.

A third option is to reduce the payments during the forbearance window by either a fixed amount or an interest only payment. With TValue, click on Expand to display the payments individually. You can change the appropriate payments to the dollar amount of each payment or an interest only payment. Any unpaid interest will accrue. Then you will need to restructure the back end of the loan as in the first example above.

TValue is an excellent tool to handle modification and forbearance agreements and can handle any type of restructuring that you would need. Most of these situations minimize payments for the short term and either have a catch-up period or extension of the maturity date. If you need to do catch up payments over a period of time, TValue can handle that too. We have a video on a couple of these deal structures at Forbearance and Restructuring Loans that you can watch or you can give our TValue Support Team a call at 800-426-4741 and we can walk you through your calculation.