Monday, February 9, 2009

Insider: Mortgage loan modification advice

This post was contributed anonymously to Prosper Lending Review in an effort to warn homeowners of the unethical behavior of some mortgage loan modification companies. The author has stopped assisting with loan modifications pending more information from the office of the Attorney General.

I own a small notary signing service. I’m frequently called upon by out-of-state banks to be their witness to their clients signing loans or financial documents. Likewise, I witness signatures on powers of attorney, wills and other legal documents. In recent weeks, almost all of my work has been on loan modifications.

First things first: What is a loan modification? A loan modification is an agreement between lender and borrower to adjust the terms of a mortgage. This is generally only done on primary residences for borrowers who are considered to be at risk of foreclosure. A loan modification is not a refinance. It is a not a new loan—it is modified terms to the original loan—generally at a loss to the lender. The lender’s two opportunities are to cut you a deal, or to take the house and risk the already flooded market with the home.

Second: Who provides loan modification services? Practically anyone. This is the latest craze in the financial and real estate world, and a service called “loan modification assistance” is being provided by practically any kind of real estate or financial organization for a fee. However, in the purest and truest form of the matter, a loan modification is only performed between the borrower and lender.

Loan modifications can be performed by individuals, working direct with their lenders or a non profit debt relief agency or a government lending or housing agency (such as HUD, Fannie May or Freddy Mac or Indy Mac).

Several major mortgage providers including CitiGroup, JP Morgan Chase, Countrywide, Nationwide and Bank of America have launched “homeowner retention” programs on their Web sites.

Attorneys and firms calling themselves “legal services” or “real estate services” (which in my experience are sometimes neither) may offer to do this service for a fee ranging from $100 to $5000, and often the fee is collected up-front without a guarantee of services to be provided. Their only guarantee is that they will contact the lender on behalf of the borrower, and they will not guarantee the result.

Whether you choose to pursue a mortgage loan modification yourself, or use a fee-based service, you should know in advance that there are likely to be some requirements:
  1. You must be in arrears and unable to pay your debt but showing good faith effort to do so.
  2. You must be able to demonstrate a hardship. Owning a home in excess of your ability to pay isn’t a hardship. Sudden disability or loss of employment or a serious illness is a hardship.
  3. You’re going to have to show that you will be able to meet the financial obligation in the future.
  4. You’re going to have to show your cards. And your budget, the good the bad and the ugly. They’ll want to see your bank statements too. If you bought Superbowl tickets or just took a cruise—you don’t have a hardship—you’ve got a bad case of confused financial priorities.
If you find yourself in a position where you fear the loss of your home, I encourage you to work directly with your lender first—or with a government program like HUD. A good second step may be to have an experienced mortgage attorney look at your existing loan documents to see what opportunities you have. If, for instance, you did not receive truth in lending documents or the notice of right to cancel you may have some grounds to get a better term from your lender.

If you feel like you need to use professionals, you should contact your state attorney general’s office to see if the provider you would like to use is licensed in your state or if any complaints have been made against them. Likewise, check with the Better Business Bureau at Licensing rules for these modification companies ranges wildly from state to state, so the Attorney General’s office will be able to tell you if there are actions pending on the issue and or what agency in your state regulates this practice.

Several states, including Washington and California have issued warnings about fraudulent practices in the loan modification business. The Federal Trade Commission has published a warning about foreclosure rescue scams. As with any other service, be a smart consumer and know your provider.


Tom said...

I'd be curious to hear stories from people who have been victims of unethical loan modification companies.

Over a year ago I wrote a guest post for Lending Club about avoiding lending scams. Several people have posted their own stories in the comments. It has saved people thousands of dollars. Hopefully this post will do the same.

Matt said...

I would think that in many cases it would be very difficult to get a loan modification. The reason for this is that most mortgages are not held by a single bank or institution, but instead are bundled into securities. If a bank holds the mortgage then they can modify terms, but if they have been bundled into a security then they have to get permission from owners of the securities, or be able to have rock solid proof that the modification was in the interest of the holders of the securities.

Anonymous said...

Most of the phony companies offering “loan modifications” are charging a fee only for the services of attempting to modify the loan—with no guarantees.

By the time the modification is denied, often the borrower is out of money to fight back—they paid their bills to the best of their ability and paid the “mod company” sometimes up to 5,000. It takes three of four months before the mod company informs the person that their modification isn’t available. Usually within a matter of days the home is scheduled for auction.

For best bets on a legitimate modification, see HUD. They’ll work with the lenders. Lenders know that it’s in their best interest to risk a small loss modifying a loan, than a massive loss trying to liquidate a property in this already-flooded market.

Zylam said...

What kind of loan-to-value ratio is needed for modification? Does it work for "underwater" homeowners?

Sara said...

Mortgage loan modification has become quite popular these days as many people are underwater on their homes. It should be noted here that, if you wish you modify your home loan, you should always contact your current lender. Many a times, third party loan modification specialists can be scams. In order to get your loan modified, you will have to prove your financial hardship. Apart from this, it will be easier for you to qualify for a loan modification if you are in default for the past 2-3 months. This will make it easier for you to convince your lender for mortgage modification.