The information on this page is published for informational purposes only. It is not meant to serve as legal advice.
HOME LOAN MODIFICATION
I have been contacted by many people seeking representation in modifying a home mortgage. Although I have helped borrowers in mortgage modification negotiations in special circumstances, this is not a common practice for me, nor an area in which I like to practice. The reason for this is that, in my experience, the vast majority of home loan modification attempts fail, and I don’t like to offer a service where failure is highly likely.
I am writing this information from my experience as an bankruptcy attorney who has worked with many people filing bankruptcy after their failed attempts at home loan modification. I hope to educate people in what to expect, how to avoid fraud, and help people make logical decisions.
In my opinion HAMP, and other weak government legislation, have given borrowers the false sense of hope that a loan modification is probable. A loan modification is possible; however, it is not probable. The likelihood of success rests in the details of a particular borrower’s circumstances, and the typical circumstances do not usual lead to loan modification.
The typical borrower seeking a loan modification is in a home that is “underwater” (the value of the home is less than the amount owed on the first mortgage) and is having difficulty making mortgage payments. Most often there is a home equity line of credit (second mortgage) attached to the home. Loan modification of the first mortgage is unlikely in this scenario.
The problem with loan modification success is that the banks have set up a system for modification failure, and have no incentive to modify a home loan. It is important to know that typically, a lender will not even consider a loan modification unless the borrower has missed mortgage payments. Keep in mind that missing payments on purpose, while helpful in facilitating the start of a negotiation process, will affect your credit rating. Therefore, it is a tactic that must be approached with an understanding of the ramifications and affects, and utilized with caution. Also keep in mind that banks will usually not negotiate if you have an ability to pay your current mortgage. The following link to the FICO Banking Analytics Blog provides information on how mortgage delinquencies, foreclosures, and short sales affect credit scores:
YOU CAN REPRESENT YOURSELF
In the world of home loan modification, an intelligent homeowner can represent him/herself just as well as anyone else. The only real advantage anyone can offer a borrower would be if that person has some long term/special working relationship with a decision maker at the borrower’s creditor bank. Barring that, all paperwork requests from the bank, and the process of applying for a loan modification is the same for everyone. An attorney with knowledge and experience in the field would be helpful because such a person knows the process, would be able to inspect documents for legal defects, would know the applicable laws and how to utilize the laws, could investigate for predatory lending practices, and would be taken more seriously by the lender by virtue of being a lawyer. However, the key is finding a qualified lawyer and being prepared to incur the increased cost.
BEWARE OF FRAUD!
California law prohibits any person, including real estate licensees and attorneys, from demanding, claiming, charging, collecting or receiving an upfront fee from a borrower in connection with a promise to modify the borrower’s residential loan or to do some other form of mortgage loan forbearance. The advance fee prohibition for loan modification and forbearance services applies to residential property containing four or fewer dwelling units. The law applies to anyone in California performing loan modification services as well as to those outside of California who offer these services to California consumers. It also mandates any person performing loan modification services for a fee to disclose to the borrower that similar services are available from approved non-profit housing counselors free of charge.
A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from the local HUD office or by visiting:
Those individuals and entities not in compliance with the provisions of the law should be reported to the Department of Real Estate. Generally, before an individual or company may lawfully perform loan modification services they must obtain a license from the Department of Real Estate or be licensed as an attorney acting within the scope of his or her license. Consumers can get information on how to file a complaint or may check the license status of a company or individual by going to the Department’s web site at:
(The above excerpt is from California Department of Real Estate news release 10/21/09)
THE COMMON SCENARIO
The common scenario goes like this: Your first contacts are unfruitful and you waste time talking to people that have no power to negotiate; You finally get to someone who tells you that you need to fill out forms and send in required information which will usually include 3 months of pay stubs, 2 years of tax returns, a list of assets and liabilities, all bank statements for the past 3 months, and a financial hardship letter; You send in all of the required information and check to see if the lender received it and the lender says something is missing; You re-send the supposedly missing documents; After a couple of rounds of this the lender finally tells you that someone has been assigned and gives you the contact information; You contact that person and are told that some paperwork is missing; You send in the supposedly missing documents again; The file gets transferred to a new person in charge; you go through the process of sending in documents supposedly missing; Finally, the lender says it has all documents; You are either denied or, in very rare cases, given a three month trial modification; If you are lucky enough to get the trial modification, it reverts to the original mortgage terms after the three month trial.
I have never met anyone attempting a loan modification who did not fall into the above scenario. If you know of a success story, please contact me with the details. I would love to hear that the process worked for someone.
IT TAKES A LONG TIME
Be prepared to test your patience. The process usually takes at least six months and requires much time on the telephone (on hold and otherwise), compiling documents, photocopying, faxing and mailing. And all of this effort usually culminates in failure. But that doesn’t necessarily mean it’s not worth giving it a shot, if you have the patience and the time.
NEGOTIATING A LOAN MODIFICATION DOESN’T STOP FORECLOSURE
There is currently no law requiring banks to stop pursuing foreclosure on a home once the loan modification process has been started. Banks can pursue the process, called “dual track”, in which the bank continues with the steps toward foreclosure even while working with a borrower on a loan modification. As of the time of writing this, there is currently a California bill moving floating around Sacramento to end “dual tracking” (which didn’t pass in April 2011). The U.S. Department of the Treasury attempted to address this problem. You can read the order at: http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html However, so far the order has no teeth. It is important that anyone pursuing a loan modification know that “dual track” exists and keep aware of what the lender is doing through the modification process.
WHAT TO DO?
Don’t make decisions based on emotion
I’ve described what could be called a bleak picture; however, it is a realistic picture. What I have learned in my practice is that people invariably have emotional attachments to their houses. I understand this. However, logical and beneficial decisions will only come from removing emotional attachment. In the end, a house is a thing, a possession. It is a financial investment. Decisions on what to do with any bad investment must be approached with a business mindset.
Banks are usually willing to agree to short sales. A short sale occurs where all creditors having a security interest in a house agree to settle for less than the full value their interest. The borrower typically must be in financial hardship and not have the ability to pay. For example, a home has a first mortgage of $100,000 and a second mortgage of $50,000. The house is worth $75,000. In a proper short sale, if the home sold for $75,000 the first mortgage would agree to receive the majority of the proceeds (for example $70,000) and the second would have to agree to receive some lesser amount (here, $5,000).
A short sale is a good way for a person to get out of a bad home investment in many ways. First, after completion of the sale, the former homeowner walks away with almost no liability from the transaction. In most cases, a second mortgage is a home equity line of credit (HELOC) which is both secured by the value of the home and is a recourse loan. A recourse loan means that the lender can go directly after the borrower personally for the debt. Therefore, the HELOC lender could eventually get a judgment from a court stating that a person owes the debt, then initiate such methods of collection as liens and wage garnishment. If a HELOC lender agrees to a short sale, it is important that the agreement state that it waives all of its recourse rights under the original contract so that whatever it gets in the short sale is a final settlement of the HELOC debt. The balance of the debt owed on the loans is usually forgiven by the banks and a Form 1099c is issued. More on 1099c below.
Second, it has been reported that a short sale has less of a negative impact on a credit rating that foreclosure or bankruptcy. The ways that credit worthiness is rated by the credit reporting agencies is nebulous. However, because a short sale is an agreement reached by the borrower and lenders, it makes sense that the affect should have less of a negative impact.
Third, a short sale can be handled by a realtor. Experienced realtors have the knowledge and resources to properly execute a short sale negotiation and sale. A knowledgeable relator should make the process relatively simple and hassle free for the homeowner.
IRS Form 1099C
When a debt obligation is forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. This cancelled debt is usually calculated as earned income on your tax return. However, certain circumstances the Mortgage Forgiveness Debt Relief Act of 2007 may be able to exclude forgiven debt from income. California has a law that basically mirrors the federal law. You can read more details at:
Federal Mortgage Debt Relief
California Mortgage Debt Relief
Bankruptcy is also an option. The Bankruptcy Court will not get involved with modifying an existing loan. However, a bankruptcy filing will stop foreclosure proceedings through the Automatic Stay, and bankruptcy provides the possibility of “Lien Stripping” a second mortgage. The following is reiterated from the Bankruptcy Primer section of this site covering the Automatic Stay and “Lien Stripping”.
The Automatic Stay
One of the most basic protections of a bankruptcy filing is the Automatic Stay of section 362 of the bankruptcy code. The automatic stay stops most collection actions, including foreclosure proceedings, and allows the debtor some “breathing room” in order to get financial affairs in order. The Automatic Stay, as the name implies, occurs automatically upon the filing of the Voluntary Petition. Creditors who do not abide by the Automatic Stay can be subject to sanctions from the bankruptcy court.
Immediately upon filing the Voluntary Petition, all assets of the debtor are basically under the control of the the Court and the court appointed trustee who will oversee that the debtor has been truthful in the filing, that the debtor qualifies for bankruptcy protection, the debtor has properly claimed exemptions, that creditors are protected, and that debts to creditors that can be discharged through bankruptcy are properly filed.
Lien Stripping (Getting rid of a second mortgage)
One of the unique and beneficial aspects of filing a Chapter 13 bankruptcy is the possibility of getting rid of a second mortgage. If the value of a home falls below the amount owed on the first mortgage secured by the value of the home (the home is “underwater”), a Debtor can move the court to “strip” the second lien. If the motion is granted, and the Debtor fulfills all obligations under the Chapter 13 Plan, then the second mortgage becomes a general unsecured debt which is paid in proportion to what other unsecured creditors receive under the Chapter 13 plan. At the end of fulfilling the Chapter 13 Plan (3-5 years) the Debtor would own the home owing only the first mortgage. While there can be complications in the motion to “strip” a second lien, such as valuation battles with the creditor, it remains one of the biggest advantages of filing a Chapter 13.
HOME AFFORDABLE REFINANCE PROGRAM (HARP)
HARP is a federal mortgage refinance scheme initiated to help people who are not behind on their mortgage refinance homes that have declined in value. The general requirements are:
- The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
- The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
- The current loan-to-value (LTV) ratio must be greater than 80%.
- The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.
You can find out more about HARP on these links:
In order to find out if you loan is owned by Fannie Mae or Freddie Mac you can utilize these links:
NEW DEVELOPMENT–February 9, 2012
Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses
Here is a link to the U.S. Department of Justice page detailing the settlement:
It remains to be seen if, and to what extent, this settlement will help the people. I’m hopeful, but skeptical.
More to come soon!