HAMP Loan Modifications - The Truth be Told

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Everyone has had the experience of thinking that something just is not right.  Ok, we know that something is wrong.  We know it is rotten.  It may have been the time your teenager was going to a study group on Saturday night or maybe you got passed over for a job even after your boss tells you that everyone is being treated equitably.   We have all been there.

We knew that things were rotten with the Home Affordable Modification Program (“HAMP”).  How many times could the Bank lose the paperwork, pay stubs?  How long could a modification be in underwriting?  The Trial Payment Plan (“TPP”) said it was 3 months, but it had been 12 months.  How could the Bank not have received the Trial Payments when they had received all of the regular monthly payments prior to HAMP?  How could a loan modification be approved and then denied 6 months later? 

Well in the case of Bank of America and BAC Home Loan Servicing, the facts are starting to come to light.  In a Second Amended Consolidated Class Action Complaint filed in Massachusetts, the Plaintiffs allege that Bank of America systematically failed to comply with the terms of HAMP.  It alleges that the Bank had financial incentive to avoid modifying home loans and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.  According the Compliant, this was especially true when the loans were owned by a third party investor and the Bank was merely servicing the loan. 

Recently, a declaration filed in the case by a former Bank of America employee alleges that employees were told  “to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payment(when in fact it had).  We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  In addition, the employee alleges “Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan.”         

If you applied for a loan modification with Bank of America or any other HAMP servicer and you think you should have been approved, you should complain to the Bank, the California Attorney General and you should try to join a class action lawsuit.  If you are still in the house, apply again for a loan modification and put in the hardship letter all evidence you have that you were wrongly denied before.    

Character counts.  At the end of the day, what we do matters.  If your house is a big deal to you, then act like it is a big deal.  If you should have received a loan modification, you need to speak up.  If you don’t, they win.  

This is a complicated area of the law and I recommend you to seek legal counsel prior to taking any action on a loan modification or proceeding with a short sale or foreclosure.  There may be personal and tax liability. I provide a free 30 minute consultation at all of my offices located in Walnut Creek and Brentwood.       

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2013  Joan M. Grimes. (925) 939-1680 Grimesbklaw.com

Principal Reductions on Mortgages

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Don’t Miss the Boat

Starting this summer, we have been seeing more loan modifications with principal reductions.  Yes, you read that correctly.  The loan modification that came in this morning was from Wells Fargo Home Mortgage and includes a principal reduction of $295,000 leaving a new principal balance of $290,000 on a primary residence that assessed at $285,000.  This is an immediate principal reduction, no strings attached.  We are also seeing principal forgiveness earned over three years and principal forgiveness on lines of credit.

What is causing the change in heart by the lenders?  It is the National Mortgage Settlement (“Settlement”) which started on March 1, 2012 and continues to September 1, 2016.  Servicers covered by the Settlement are Ally Financial, Inc. GMAC Mortgage, Residential Capital, Bank of America, BAC Home Loans Servicing- f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank.  Fannie Mae and Freddie Mac loans serviced by the above lenders are not eligible for benefits under the Settlement.

Under the Settlement, no borrower is “entitled” to a modification.  However, servicers receive “credits” toward the value of the “Consumer Relief” they have committed to provide over 3 ½ years through loan modifications and principal reductions.  The Servicers have committed to credits of over $16 Billion dollars under the Settlement. 

Under the Settlement, “Consumer Relief”  granted between March 1, 2012 and February 28, 2013 will receive a 25% bonus credit, so motivation exists for servicers to move quickly this first year. 

Principal write downs will be more available on lower valued properties that are “more” underwater.  The Borrower is also going to need to have adequate income, but still have a hardship.  The settlement provides for principal reductions by at least 10% to achieve target of 31% of Debt to Income (DTI) and 120%  Loan to Value (LTV). Under the terms of the Settlement, 85% plus of the first lien credits are to be for owner occupied loans within the conforming GSE limits.  Loans are 30 days delinquent/imminent default; pre-modification LTV greater than 100% with post-modification target DTI of 31% and post modification LTV less than or equal to 120%.

If your house is really underwater and you really want to keep the home for the long term, I strongly urge you to apply for a loan modification/ principal reduction.  You have nothing to lose.  It is a huge amount of work, but if you are approved, it will be worth all the effort.

However, prior to accepting any loan modification/principal reduction, seek legal counsel.  Every loan modification/principal reduction has the potential adverse personal liability and tax consequences.  If there is a principal reduction, the lender will be required to issue a 1099c which will be considered ordinary income unless you meet certain limited exceptions. If there is a junior lien on the property, a principal reduction prior to a Chapter 13 filing may prevent you from being able to avoid the lien in bankruptcy.

In conclusion, this is a great opportunity to keep your home.  However, this is a complicated area of the law.  No final paperwork should be signed accepting any modification/ principal reduction without the advice of legal counsel. A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the modification is the right decision for you.

I see people for a FREE 30 minute consultation at my offices in Walnut Creek and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   (925) 323-7772.           

© 2012 Joan Grimes

California Foreclosure Process - Know the Timeline

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       As we head into the fall of 2011, we are seeing more and more nonjudicial foreclosures being started by lenders.  In California, if you are behind on your home loan, your lender will typically use a nonjudicial foreclosure process known as a trustee’s sale to sell your home.  While it is possible for a lender to use a judicial foreclosure process which is filed through a state court action, the judicial foreclosure process is much more expensive and takes longer.  The only time we typically see a judicial foreclosure is when the lender is certain that the borrower has sufficient income or assets to pay a deficiency balance….think doctors, investment bankers.

The following is the minimum timeline for a nonjudicial foreclosure in California:

Day 1- For loans made between January 1, 2003 and December 31, 2007 on residential one-four unit owner occupied properties, California Civil Code Section 2923.5(a), requires the lender to contact the borrower by phone or in person to assess the borrower’s financial situation and explore options for avoiding foreclosure.  During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days.  The lender must also give the borrower the toll free number for finding a HUD certified housing counseling agency. 

Day 31- The Notice of Default (“NOD”) is recorded in the county where the real property is located.  Within 10 days after recordation of the NOD, a copy of the NOD must be mailed by registered or certified mail to the borrower and to any parties with a recorded Request for Notice. The NOD must run 3 months before the Notice of Sale can be posted.

Day 116-121- The Notice of Trustee’s Sale must set forth the date, time and place of the Sale.  It must also include the total amount of the unpaid balance and reasonably estimated costs, expenses, and advances at the time of the initial publication of the Notice.  The Notice must be recorded, posted, published and also mailed by registered or certified mail as well as first class mail to the borrower.  The Notice must run once a week for 3 consecutive weeks in a newspaper of general circulation.

Day 135- Up to 5 business days before the Trustee’s Sale, the borrower may reinstate the loan i.e. bring current by paying the missed payments plus allowable costs.  If the Sale is postponed, the date for the borrower to reinstate is postponed accordingly.

Day 141- At the Trustee’s Sale, the property is sold through a public auction to the highest bidder.  The borrower still has the right to redeem the property, but he must pay the entire debt, plus interest and costs before the bidding begins at the Sale.

        Most nonjudicial foreclosure in California take far longer than 141 days because the foreclosure process will be put on hold during a loan modification or short sale.  However, there is no requirement for the foreclosure to be put on hold and a borrower should not count on additional time.  This is a complicated area of the law and the implications for personal liability and tax liability are great.  If you are considering a default on your home, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the other options available to you.  In see people for free 30 minute consultations in my offices located in Walnut Creek, Antioch and Brentwood.    

WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.    GRIMESBKLAW.COM

© 2011 Joan Grimes

Why Most Loan Modifications Don’t Work

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Everyday people come into my office saying that they have been working on a loan modification for months or even years.  They have applied for the Home Affordable Modification Program (“HAMP”). They have done trial modifications, then been denied.  They have then applied for the lender’s “in house” modification program, then been denied.  They have gone to NACA and been denied.  Some people hire mortgage attorneys to file suit against the lenders.  The bottom line is that most loan modifications don’t work.  Why?

First, a loan modification does not reduce the balance on the loan.   The best we have seen is where the investor waives the accrued interest on the loan.  If a person tells you they got a principal reduction, it usually means that a portion of the loan balance is now a silent second which will need to be paid at the time of sale of the property or as a balloon payment later.

Second, a loan modification will require payment of principal.  Therefore, if you have an option arm loan (also known as a pick-a-payment) or an interest only loan, the loan modification payment in all likelihood will be higher than your prior payment amount.  Also, loan modification payments will include an impound for taxes and insurance which will further increase the monthly payment.     

Third, a loan modification payment will again start with a teaser interest rate of 2%-2.5% and then rise over time.  Furthermore, if you miss any payments on the loan modification, the lender in many cases has the right to go back to the original payment terms and resume the foreclosure from the prior point without starting over.

Fourth, a loan modification requires documented income sufficient to qualify for a real loan i.e. either a 30 or 40 year fixed loan.   If a borrower did not qualify for a 30 year fixed 5 years ago, how are they going to qualify now?  If a person does not receive a regular paycheck, monies need to be going through a bank account to show income.  Loan modifications are much harder for self-employed individuals.

Fifth, even a trial modification does not guarantee a permanent modification.  I have clients who have been in trial modifications for over 1 year with no permanent modification.  The lenders are being paid to work on modifications.  The loans are in default.  They are receiving default servicing fees.  They are in no rush to do a loan modification. 

Sixth, there is no requirement for lenders to do loan modifications.  The lender can do the “Net Present Value Test” and simply say “no” to the requested modification.  As a practical matter, this means that the lender looks at  the borrower’s long term ability to pay on a modification combined with the present value of the investor’s investment i.e. the collateral. Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want to “get out” now, is very high.  On the other hand, if the value of the investment is very low at this time i.e. the value of the home is low, the lender will be more inclined to approve the modification.

In conclusion, most loan modifications make no sense for borrowers.   There will be no principal reduction or long term payment reduction.  Where loan modification make the most sense is where the balance on the first mortgage is close to the fair market value of the property and the borrowers have the ability to pay on a real loan i.e. a 30 year fixed with an impound for property taxes and insurance.  If you are considering a default on your home or considering a loan modification, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the other options available to you.  In see people for free 30 minute consultations in my offices located in Walnut Creek, Antioch and Brentwood.    

WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

 

DO NOT MOVE….I REPEAT….

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DO NOT LEAVE YOUR HOME…  UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED 

Every day people come into my office indicating that they moved out of their home many months (or even years ago) and the bank still has not foreclosed.  They are now concerned because the city is sending them bills for maintenance on the property and the Homeowners Association is suing them for back payments even though they are no longer living at the home.  If you are behind on your mortgage, have tried a loan modification and have been denied or know you will not be able to keep the home, what should you do?

First, DO NOT MOVE… I REPEAT…DO NOT MOVE UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  You are now living in your home without paying your mortgage.  It is free!  You should not start paying rent someplace else when you can live in your home for free.

Second, KEEP UP THE PROPERTY.  YOU ARE STILL RESPONSIBLE FOR THE PROPERTY UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  So, even if you moved, you are still responsible for the maintenance of the property and payment of any Homeowner Association dues.  You do not need to pay the property taxes, but you should maintain the homeowners insurance.  Therefore, if you are still responsible for the maintenance and HOA payment, you might as well enjoy the property and the amenities.

Third, CONTINUE TO TALK TO YOUR LENDER TO SEE IF ANY NEW OPTIONS ARE AVAILABLE TO YOU.  Starting January 1, 2011, the State of California is offering new assistance programs through your lender if you are behind on your mortgage. 

Fourth, SEEK LEGAL COUNSEL.  Depending on your situation, a real estate or bankruptcy attorney will be able to advise you whether a short sale may be a better alternative for you than a foreclosure.  Also, if you have other debt which you are unable to pay off such as credit cards, lines of credit or car loans, a bankruptcy may be the best alternative for you.  However, if  you are no longer in the home, the debt against the property cannot be used to offset income.  Therefore, if you (or your family) have income over the average median income in California (Family 1- $47,234, Family 2-$61,954, Family 3-$67,562), you will want to file the bankruptcy case prior to leaving the home.  Leaving the home prior to the bankruptcy filing may mean the filing of a Chapter 13 repayment plan versus a straight Chapter 7 where no debts must be repaid.

In conclusion, do not move until the Bank forecloses or the short sale is completed.  It is still your home until the bank forecloses which can be months or years from the time you stop paying.  The average time of a foreclose in California is now 451 days from the date of default.  That means potentially 451 days of FREE RENT or more.  Since you are still responsible for the property, you might as well enjoy it.  This is a complicated area of the law.  You are in the deep end of the pool.  Do not swim alone.  The buddy system is essential.  Seek a buddy in legal counsel prior to taking any action.  I see people everyday for a FREE 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.  GRIMESBKLAW.COM

  © 2011 Joan Grimes

In Limbo: The Forever Trial Modification

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Every day, at least 1 person comes into my office complaining that they have made all of their payments under a trial loan modification, but there has been no permanent modification.  According to the latest numbers, only 4% of all trial modifications under HAMP have become permanent.  The Treasury indicated in December, 2009 that it would start fining lenders for failing to complete loan modifications, but we have seen little improvement yet. 

Borrowers are told a host of explanations as to why there has been no permanent loan modification on their loan including missing paperwork, the loan is with a negotiator or simply that the loan modification takes time.  While all of these explanations may be true, the result is that borrowers throughout the country are left in limbo not knowing whether they should try to stay or make preparations for leaving the home.  To make matters worse, most borrowers know that the loan modification documentation signed by them warns that foreclosure may be immediately resumed from the point at which it was suspended if this trial modification plan terminates and no new notice of default, notice of intent to accelerate, or similar notice is required. What should they do?

In order to reduce some of their anxiety, I ask them to work through a simple 3 step process to see if any loan modification really makes any sense for them.

        Step 1- What are the terms of the loan modification being offered?  There are many types of loan modification/forbearances being offered by lenders.  However, the one most helpful to borrowers is HAMP which stands for Home Affordable Modification Program.  Lenders are not required to participate in this plan.  However, the biggest lenders including Bank of America, JPMorgan Chase Bank, Wells Fargo Bank, Citibank and American Home Mortgage Servicing are participating.  The program lowers the interest rate to 2% for years 1-5 and increases the interest rate over the next 3 years until it is fixed in year 8 at approximately 4.5% -5.0% for the remaining term of the loan or in some instances extending the loan term to a 40 year loan.  If the trial period is not for a HAMP loan modification, you should immediately contact the lender and apply for HAMP loan modification.

        Step 2-  Can you pay off the principal balance?  A good rule of thumb is that a borrower can payoff 2-2.5 times their gross household income in a home loan over the course of their working life and go on vacation and have a child or two.  Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000.  This is assuming a 30 year fixed loan.  If a borrower has less than 30 years remaining work time, the amount should be reduced accordingly.  If you determine that you are never going to “own” this property, is this the best use of your money?  If you didn’t have this huge mortgage payment plus property taxes, insurance and maintenance, could you be putting away more money into retirement or maybe saving for a home you could actually “own.”

        Step 3- Is the loan modification payment less than I would pay in rent?  Assuming, the above calculation shows that you will not be able to pay off the balance of the loan over the course of your remaining work career, is the loan modification payment still less than I would pay in rent?  Depending on where you live, the loan modification payment may still be less than rent you would pay in your immediate area.

Loan Modifications are difficult.  Most of these loans were made with little or no documentation and now the lenders seem to be requiring full loan documentation at the beginning, middle and whenever they feel like it until they decide a loan modification is granted or denied.    If you are in a forever trial modification, I urge to continue a dialogue with the lender seeing if any new programs have become available which may help you.  In 2010, we expect lenders with the assistance of the federal government to roll out additional loan modification programs. I recommend calling the lender at least once a week.  Continue to ask if there is anything new available.  A 4% permanent loan modification rate is not good, but if it improves, you do not want to miss the modification which may allow to retain your home.   

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2011 Joan M. Grimes. Grimesbklaw.com

Late on Mortgage Payments? Is a Loan Modification for You?

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 In the last column, I discussed the “overall” problems with loan modifications. Specifically, that most of the programs do not give any meaningful modification to the loan and there is no “upfront” approval or denial of the modification prior to entering into the trial modifications payments.

Since the column was published, I have received many calls wanting to know more nuts and bolts information about the current state of loan modification programs. So here is what I know after 2 years.

1. Income- The borrower needs to have documented income.  If the borrower does not receive a regular paycheck, monies need to be going through a bank account to show income.  Loan modifications are much harder for self-employed individuals.

2. Loan Modification Payments include payment of principal.  Therefore, if you have an option arm loan (also known as a pick-a-payment) or an interest only loan, the loan modification payment will in all likelihood be higher than your prior payment amount.  Also, loan modification payments will  include an impound for taxes and insurance which will further increase the monthly payment.     

3.  There are no principal balance reductions.  The best we have seen is where the investor waives the accrued interest on the loan.  If a person tells you they got a principal reduction, it is usually means that a portion of the loan balance is now a  silent second which will need to be paid at the time of sale of the property or as a balloon payment later.

4.  A trial modification does not guarantee a permanent modification.  I have clients who have been in trial modifications for over 1 year with no permanent modification.  The word on the street is that “new” people who are applying for modifications will have their underwriting done prior to starting the trial modification and that the modification is guaranteed.  However, I will believe it when I see it. 

5.  Consider filing bankruptcy to discharge credit card and other unsecured debt before applying for loan modification.  When you apply for a loan modification, the lender will run your credit.  While a low credit score will not prevent a modification, the less unsecured debt you have, the more money you will have available to make the modification payments.  A Chapter 13 may also be available to avoid a junior lien on your home.    

6.  Net Present Value Test.  This is the mystery calculation used by investors to determine whether a loan modification should approved.  What we do know is that the borrower’s long term ability to pay on a modification combined with the present value of the investor’s investment i.e. the collateral weighs heavily in the calculation.  Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want “get out” now, is very high.  On the other hand, if the value of the investment is very low at this time i.e. the value of the home is low, the lender will be more inclined to approve the modification.

In conclusion, most loan modifications make no sense for borrowers.   There will be no principal reduction or long term payment reduction.  However, if you are considering a a default on your home or considering a loan modification, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision.    

*WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   

© 2010 Joan Grimes



 

And the Scam Goes On

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In every scam, the victim must be desperate. They must “believe” they are going to miss out or possibly die without the product or service. It doesn’t matter what the product or service is although sex, money and death are big sellers.

The mortgage scam was no different. It brought the promise of the American Dream of Homeownership through no money down, interest only or option arm loans.

The loan modification scam is a continuation of mortgage scam. The victim is still desperate, but now they are desperate not to lose the “American Dream.” It is now the promise of a lower fixed monthly payment and a principal reduction.

Most modifications are scams because they do not reduce principal or payment amounts. Get the borrowers to start making “trial” payments and then repeatedly ask for documentation. These are really just “Hope” modifications. Nothing concrete, just the hope of something in the future like a Hail Mary pass with 30 seconds left in the game.

The lenders know that if the borrower keeps making “trial” payments and “updating” their paperwork, they will have one less property on their books, will have time to negotiate with their mortgage insurer, investor and in some instances investigate the borrowers to see if there has been any irregularities in the loan process. Few people get a meaningful modification. The best we have seen is the accrued interest write down by Wells Fargo Bank on the World Savings Pick-a-Payment loans. I am sure that there will be a few modifications with 40-50% write down of principal, but as an attorney who represented banks for 20 years, they are only going to do it if they made a mistake and are required to make the modification. They didn’t get rich by giving away money.

Most modification programs are scams because there is no up front approval or denial. The borrower submits documentation and begins trial payments not knowing if they will be approved or denied for many months or years. In the meantime, every month their credit score is being reduced because they are not paying “as agreed.” The fact is that property valuation and income/debt ratio analysis is a secret and is never disclosed. The borrower has no ability to determine why they have been denied for the modification. What should they do?

In order to reduce their anxiety, I ask them to work through a 3 step process to see if a modification makes sense.

Step 1- What are the terms of the modification? Is the modification just putting the late payments at the end or is there an interest rate or principal reduction?

Step 2- Can you pay off the balance? A good rule of thumb is that a borrower can payoff 2-2.5 times his gross household income in 30 years and go on vacation and have a child or two. Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000. If you determine that you are never going to “own” this property, is this the best use of your money?

Step 3- Is the modification payment less than I would pay in rent? Assuming, the above calculation shows that you will not pay off the balance, is the modification payment still less than rent?

Most loan modifications programs make no sense. There will be no principal or long term payment reduction. It is a temporary band-aid. If you are in a trial modification, I urge to consider whether this is in your best interest. The lenders have no problem doing what is in their best interest and you should not either.

 

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2010 Joan Grimes