An article authored by Patrick Pulatie
No matter where you turn today, the most common remedy prescribed for people facing foreclosure, or who have been the victim of subprime loans and predatory lending, is the Loan Modification. So, what is a loan modification and how does it work?
A loan modification is a process whereby the original terms of a mortgage are changed in order for you to better meet your mortgage obligations. It will usually involve a lower interest rate, and adding missed payments onto the rear of the loan. Doing so is expected to get a borrower current on the mortgage and having a mortgage payment that can be made each month. These changes can be anywhere from one year to thirty years, depending upon the lender.
(Do not get Forbearance confused with Loan Modification. Forbearance is a process whereby the lender will temporarily change the terms of the loan for a homeowner to get caught up on his late payments. The problem is that this involves higher payments than before and it does not change the terms of the loan. Also, it only postpones the foreclosure and if you miss just one payment, the foreclosure process resumes, and the forbearance in terminated.)
The process for getting a loan modification is supposed to be pretty straightforward. You gather the documents that the lender requires and fax those documents to them. This includes an accurate monthly budget, income documentation, hardship letter and any other records that might be needed. (Most often, these documents are lost, or never received, so expect to be faxing them again, time and time over.) The lender will then review the documents and make a decision.
If only it were that easy. In reality, the loan modification process is the most convoluted process imaginable. Each lender is reported to have their own standards and procedures, ones that can change on a daily basis, and from person to person. The apparent truth is that there are no set guidelines for loan modifications with most lenders, as I have been told by a person who works in loss mitigation for a major lender. To make matters worse, each loss mitigation counselor has at any one time, from 500 to 800 files sitting on their desk. Only a tiny portion of these files get worked, so most people end up with nothing.
When applying for loan mods, homeowners are being told that they must be behind on the mortgage before a loan modification can be started. So the homeowner will deliberately miss payments at the lender’s insistence. Then, when the mod process is started, many lenders will reverse course and tell the homeowner that they must be caught up on payments before it can go forward. To make matters worse, you will hang on the phone for hours, never speaking to the same person twice, and when you do talk to a live person, you will have to retell your story again and again.
In the meantime, homeowners will trash their credit, grow increasingly frustrated with the process and eventually just give up, oftentimes of which it will mean that they end up losing their homes. Of people who try to get loan modifications on their own, less than 20% actually do get modified.
How does a person get a loan modification for their home? Increasingly frustrated homeowners are now turning to outside “experts” for assistance in achieving loan modifications. These companies can be summed up in the following.
The Loan Modification “Factory” as I like to term it, is one of the worst. These are companies on the internet and elsewhere who engage in massive advertising and even telemarketing. The websites only say to contact them about a loan mod and may have very little information about the company or themselves. The costs can run from $1500 up to $2500 or more. There is no concern within the company employees about whether the prson could even afford the payment if a loan mod was received, or even if they could qualify. It is “Take the Money and Run”.
A second type of company doing loan modifications are the loan officers who can no longer make a living doing loans. They have “transferred” over into loan modifications because they see the lure of “big money”. The truth is that these loan officers do not have the “right stuff” for the loan mod business. Loan mods are about helping people, and not expecting to make “big money” but instead trying to correct the wrongs done to people over the past several years. If this is not a part of their motivation, then they cannot do mods well and to use them is generally a waste of money.
The third resource for loan modifications are lawyers. There are many lawyers trying to do mods right now. As can be expected, where there is money to be made, the lawyers will be there. (My apologies to my friends who are lawyers, but I know that you agree with this statement. I don’t include you among this group.) There are some good lawyers working with homeowners, but very few fit this category. Most are jumping into the business. And most are relying upon loan officers to guide them in understanding the law as pertaining to mortgage. (Even most Real Estate attorneys do not understand TILA and RESPA. I spend half my time educating them on the various facets of the law and how to approach the lenders.) But, if you find a good lawyer who knows this stuff, you are in good hands.)
The fourth resource to discuss is the loan modification company that is associated with and works directly with lawyers. These companies are very successful. They tend to have excellent results in getting loan modifications. That is because they use the techniques to get approval that most mod companies and loan officers do not even know about, the primary technique being the Loan Audit, where all violations of law in the loan are found and used to “hit the lender over the head” with it. Implied, of course, is the threat of legal actions including lawsuits.
That said, I have some real issues with these firms. Those issues are simple, the fees charged. They, in my opinion, can be quite excessive. And the fees are on a sliding scale, the greater the loan amount, the more the fees. In other words, if the homeowner has a larger loan, then they can afford to pay more. What is not generally known is that the greater the fees, the more the commission to the modification representative who found the homeowner in the first place. This commission can be over 50% of the total fees.
Here are some actual fees from one company
Loan Modification Fees:
- The cost for a loan modification is $1,500 for a mortgage up to $350,000
- $350,001–$750,000 is $2,000
- $750,001 and $1,000,000 is $2,500
- $1,000,001 and up is $3,500
A second mortgage is and additional $500 if it is a different lender than your first mortgage
The final loan modification resource that I shall briefly mention is a low-cost network of attorneys doing modifications. These attorneys have the knowledge and support of the larger firms, but total costs for loan modifications tend to run between $1000 and $1500.
Hopefully, this gives you a better insight into the loan modification business. There is much good that can come to a homeowner who desires a loan modification, but due diligence must be practiced to be sure that the company is the right one for you.
(Patrick is a loan officer with 12 years of experience in the field. He does loan audits for several lawyers in numerous states and is a part of the legal team for a well known Northern California lawyer. He has served as an Expert Witness in Federal Courts and regularly advises lawyers regarding TILA and RESPA issues. He can be contacted at 925-522-0371 or at Patrick@loanmodificationca.com. His website is LoanModificationCA.com Please remember, he is not a licensed attorney and does not dispense legal advice.)