Loan Modification - Buyer Beware

With the national unprecedented rise in foreclosures and delinquent mortgages caused in part by irresponsible lending practices during 2001 to 2007, and exacerbated by the economic downturn, a plethora of Loan Modifications companies have popped up looking to take your money.

Why hire a modification company?

The common perception of the average consumer is that my lender does not want to take the loss by foreclosing on my property and that they want to work with me if I need financial help in modifying my loan. In most cases, nothing could be further from the truth! Most lenders, despite taking TARP money, have little interest in helping the average consumer and have hired an army of minions in their loss mitigation departments who will block you at every step and lose your paperwork in a focused attempt to dissuade all but the most tenacious and astute borrower. Additionally, they will push you to take your financial information so they may record and document it, mainly in an effort to disqualify you from a loan modification.

To qualify for a loan modification, your financial situation (assets vs. liabilities) must fit into a narrowly defined box for your lender to consider you for a modification. You must have just enough income, but not too much. Your debt to income ratios must fit within certain guidelines, and these guidelines vary be lender and change all the time based on the Investors guidelines (the person or entity that actually owns your Mortgage Note as the bank is just the servicer in most cases). Your housing costs vs. your net income must be within certain limits as well. Giving your financials incorrectly or not within guidelines may permanently disqualify you for a loan modification, ending your chances for financial relief. It is in properly preparing your financials where Loan Modification companies in part earn their money!

What type of loan modification company should I hire?

Buyer beware! There are many non-qualified companies including debt settlement companies and former mortgage companies vying for your money, all claiming to help you with a loan modification. They promise you anything and tell you what you want to hear in regards to the outcome of your case without taking any financial information or doing any analysis of your situation. A reputable company will turn down close to 40% of the people seeking help as they will not fit within the lenders modification guidelines.

Many companies have started offering a “money back guarantee”. Don’t be fooled! They are doing this because of the recent crackdown by the Department of Real Estates limits on advance fees for loan modification services on non-attorneys as many consumers have been ripped off! Most of your fees will be eaten up in “hard costs” which they are allowed to keep. Many non-attorney or “Attorney based” or “Attorney backed” companies are operating illegally. Beware as these companies are taking money, filling out the basic paperwork for submission to the lender, but not fighting for you in most cases. They are loosely using attorneys in an attempt to skirt Department of Real Estate laws and guidelines, but also do not follow state bar guidelines as they are not a Law Office and you are not directly retaining an attorney. These are mortgage companies or former mortgage brokers in most cases who have hired an attorney but are not a law office. Their attorney cannot legally represent you! Unless you directly retain an attorney, they are unable to directly represent you and your rights will not be protected. Robert G. Scurrah, attorney for the Consumer Debt Advocate Law Center ( www.cdalawcenter.com) states: “Make sure the attorney is on site, that he directly works on your case, that he is available for a discussion, as after all, you are his client! Based on bar rules, your attorney must work on your case and directly supervise the employees working on your case, and he must document that work. The company cannot have an owner that is not an attorney. Make sure that your attorney is available to meet with you if your go down to the office. Ask these questions as if you do not hire a law center or law firm, you are likely being misled.” Mr. Scurrah goes on and says that: ”I or one of our associate attorneys are hands on with every case and personally prepare the case proposal letters as well as other correspondence with our clients lenders. We want to ensure that our client’s unique hardship and financial situation is fully illuminated for the lenders and we are directly involved in the negotiation process which yields better results for our clients.”

The banks are not very receptive if you have not retained an attorney from a law center or law office. Understand that re-negotiating an existing executed contract by its very definition is the practice of law. Only an attorney can practice law which is why so many of these companies are being shut down by the various government agencies. If you want someone to leverage the fact that there are predatory lending issues on your case, push the lender to modify, make sure you hire an attorney. Do your diligence!!

What type of outcome can I reasonably expect?

A loan modification by definition is designed as temporary financial relief to help a borrower get through a documentable financial hardship such as job loss, income loss, divorce, medical issues, etc. It is not as give-away program just because you want a lower payment. A proposed payment to your lender is typically calculated by taking your net income and trying to fit it within the upper limits of your lenders underwriting guidelines. If you are being promised a new interest rate or a principal write down by a company, they are likely scamming you. Make sure the company takes a full financial profile before determining if they can help you. Make sure they are proposing a new payment within the lenders underwriting guidelines.

Lenders are typically not doing any principal write down despite the fact that many homeowners owe more than their home is worth. Why is this? You made a risk based investment when you bought your home and it is not your lenders responsibility to bail you out. They did not add money onto your loan balance while your property was appreciating, and they are not responsible for bailing you out now that it has depreciated, as it will go up in value once the liquidity and credit crisis is over when buyers come back to the market. If you are being offered this up front by a loan modification company, you are likely being scammed as very few borrowers can reasonably expect a write down, unless it is on a second mortgage with the same lender who holds your primary mortgage, and even then it is hit or miss. Your attorney can certainly ask for that as part of your proposal if you desire, but understand going in that it is a long shot.

Most modifications are for a 3-5 year terms, and some lenders are offering a market rate fixed for 30 years after that term if you currently have a high interest rate. Some large mortgage can get the term extended to 40 years to further lower your payment, it depends on the bank you are working with. We have found that Countrywide Home Mortgage is the most difficult bank to work with as unlike most banks, they are being very unreasonable and seem to be deliberately turning down as many people as possible despite taking TARP money and a PR campaign proclaiming how they are helping people. This lack of a reasonable negotiation process was clearly documented on an NBC Nightline episode featuring Congresswoman Waters who was trying to help a constituent get a loan modification from Countrywide Home loans. Countrywide and Bank of America who now owns them should be ashamed of the way they are acting! If you owe an arrearage, you may expect the lender to add that to your principal balance and not make you come up with it during the loan modification, unless you owe more than 3 months in missed payments. In that case, expect to come up with a good faith payment of up to 30% of the arrearage to get you “current” with your lender, and they may offer you a “pre-modification” agreement at first. If you make these payments, it will often convert to a permanent modification if you do not make a late payment or miss another one.

In summary, never pay for loan modification services unless you are retaining an attorney who has at the very least taken your full financial profile before determining if they will take your case. If they are not interested enough to see if you qualify, they have little regard for the outcome of your case. Remember, it is still a negotiation process and ultimately it is up to the lender to decide if they will modify your loan. If you don’t fit within the financial guidelines of your lender, your chances of a successful outcome are slim.