How to Get a Loan Modification, Never Pay Up Front

There have been countless changes in the loan modification industry since in began en force circa 2007. Most importantly was the systematic weeding out of fraudulent service providers who set up shop to take advantage of distressed homeowners by charging a fee up front an never doing any work. I'll say this now and repeat it again as it's the single most important bit of information you should know when seeking a loan modification: NEVER PAY UP FRONT FOR A LOAN MODIFICATION!

Who can negotiate a loan modification? 

• You - that's right. Although it can be to your benefit to have a professional help you through the process, there is nothing preventing you from attempting a loan modification on your own.
• Foreclosure Consultant - These individuals are typically non licensed professionals and can either be for profit or non-profit companies. After July 1, 2009 in the state of California, all foreclosure consultants must be registered with the Attorney General's office and post a bond in the amount of $100,000 (California Civil Code section 2945.45).
• Attorney - Any attorney licensed in the state where your pending foreclosure is located. You can find all registered attorney's by searching martindale.com
• Real Estate Broker or Agent - The most common source for advice and help negotiating a loan modification or short sale. Although not all real estate agents have the experience to qualify as experts in the field, they are allowed to help if they hold a current real estate license. You may find out if your agent or broker is licensed at the California Department of Real Estate website dre.ca.gov

Protect yourself from loan modification scams. How to spot foreclosure fraud.

In case you didn't catch this in the first paragraph, NEVER PAY UP FRONT FOR A LOAN MODIFICATION! In California this practice is illegal. It's also important to remember that if it sounds too good to be true, it probably is. Just like a stated income loan with a "starting" interest rate that is unexpectedly low, a loan mod with terms that don't pass the sniff test are also unlikely to prove true.

I've listed below some of the more common loan modification scams for you to review and catalog: 

• I'll again start with the loan modification counselor who asks you to pay a fee BEFORE you've successfully obtained a PERMANENT loan modification. I'll say it again, NEVER PAY UP FRONT FOR A LOAN MODIFICATION!
• The foreclosure consultant who tells you to make your monthly payments to him/her rather than your bank during the loan modification process. This should never happen.
• The consultant who poses as a government affiliated entity. Often using names that sound like they are government related and asking you to pay them up front to qualify for one of the special government related programs like HAMP or HAFA. These groups will suggest that their company is directly linked to the program and they charge you to confirm you are eligible. Your lender will tell you if you are eligible for HAMP free of charge. You may also see the HAMP waterfall below.
• Bait and switch "rescue loans." It is imperative that everyone read and fully understand what they are signing. Bait and switch rescue loans will ask the homeowner to sign over title to their house to a third party in exchange for a new modified loan with a lower loan balance. Again, if it sounds too good to be true...
• Rent to Own and leaseback schemes. Be aware of who you are dealing with and take care not sign over title to persons or companies who ask you to sign over title promising to sell the property back to you once the process is complete. These schemes may also include asking the homeowner to move out during the process, allowing the "consultant" to collect rent until the house ultimately goes to foreclosure sale. In this case the consultant never completes the modification, rather, they just postpone the foreclosure allowing them to collect rent for a longer period.
• A late add to this list, from the CA Attorney General press release, beware of forensic loan audits. In this scenario the consulting company uses the forensic loan audit as a means of getting the homeowner to pay up front for the tools needed to complete their modification; in this case a forensic loan audit. Once the fee is paid, no work is done and the loan modification never happens.

What to be aware of going in. What are your chances of success?

The foreclosure process is stressful and often times overwhelming. In many cases home-owner's are willing to suspend reality, try anything and trust anyone who promises to allow them to stay in their home. Fueling additional confusion in the loan modification process is the fact that many defaulting homeowners used stated income loans to refinance or make their purchase. Every homeowner should know before going into the loan modification process that you must have income to qualify for a loan modification.

This is worth repeating: If you cannot document income sufficient to pay your mortgage (that is a new lower mortgage payment), you will not get a loan modification! Further, although the bank may have taken your word for it when you qualified to take out the loan, they will require you document and will definitely confirm your income before agreeing to modify your loan. Generally speaking the goal of a loan modification is to lower your monthly payments to an amount equal to 31% of your current gross income.

Banks also require you have a hardship before seeking a modification. Examples of generally accepted hardships are divorce, death of an income provider, loss of job or income, forced relocation for a job, or pending interest rate increase. They are not going to modify your loan because you'd like to refinance, if your current income supports the monthly payment.

Next, the banks expect you to spend your savings before they consider modifying your loan. Two things to note here; first some of your retirement accounts are off limits thanks to the ERISA laws, meaning the banks cannot go after or require you to liquidate them in order to make mortgage payments. Second, it is generally accepted that the banks will expect a home owner to have less than two and one half times their current monthly payment before they modify a loan. For example, if your monthly mortgage payment was $100 and you had $250 in your savings account (2 1/2 times your payment), the bank would expect you to use that money before they modify your loan.

One final note on this subject, think twice about applying for a loan modification simply to postpone a foreclosure or short sale. Almost anyone can get a temporary modification through their bank. The suggested reasoning here is that the bank is attempting to collect a bad debt, in order to evaluate their ability to collect banks will attempt to gather any and all financial information you provide to later collect on that bad debt. If you are falsely or hopelessly building a case for a modification by showing income and assets, that information may ultimately prove detrimental to your short sale negotiations.

The unsolicited loan modification from JP Morgan Chase

A few things in history have reached mythical status; the Fountain of Youth, the contents of Al Capone's vault. Our current depressed housing market has the unsolicited loan modification from Chase / WAMU. Ladies and gentlemen, I'm here to tell you it does exist. Accompanied by a letter from Steve Stein, head of the Chase Homeowner Assistance Department (I couldn't find a link to the department on the Chase website, however the phone number listed is: (888) 368-5524) the offer was received and accepted by one of my clients in Southern California.

According to the Chase documents, her "loan is eligible for (the) special program developed as part of Chase's announced effort to preserve home-ownership in America." According to my client, she never contacted Chase requesting a loan mod, nor had she ever missed or been late on any of her mortgage payments.

In reviewing the offer with her, I noted she was more than 100% underwater on her loan (previous balance approximately $600,000, estimated fair market value less than $300,000) and her interest rate was going to reset the following month. This is also an owner occupied property on a stated income, option arm, variable rate loan. The Chase modification set her interest rate to a fixed 5% for the life of the loan, reset the amortization period at 30 years from the modification date, and wait for it.... reduced her principal balance by approximately $250,000.

My point in bringing this to everyone's attention is three fold: First, pay attention to the letters and phone call offers sent to you by your current lender, although most are just collection calls, some lenders are proactively attempting to help homeowners modify their loans. Second, I've received several phone calls from clients regarding similar offers yet found very little information on such offers over the Internet or from any other sources. I wanted to share a story of success to inform you all that these possibilities do exist.

Finally, I wanted to stress the importance of principal reductions as a solution to the current housing crisis (just in case any influential bankers or politicians are reading). In the example above, my client is in her early sixties, educated, has perfect credit, and was fully aware of the current market value of her home. Like many homeowners in similar situations she is responsible and proud of her attention to financial obligations. As such, she was reluctant to ask for help while she could still pay, and felt morally opposed to a strategic default.

After the process was complete she shared the fear and and anxiety that accompanied two years of waiting for her payment to increase, realizing she had no hope of refinancing into a fixed rate loan, and knowing she couldn't sell or find another property to purchase. Her loan modification took one hour to review with an attorney, fifteen minutes to complete the paperwork that was enclosed in the packet sent by Chase, and was processed and completed before her next payment was due 15 days after she received it.

Finding the Greater Good

It seems to me there are two ways to address an obstacle. One is to brace yourself and move to minimize the negative impact you may individually encounter; the other is to proactively seek solutions for removing the obstacle and move to the collective good. In fact anyone who's seen the movie A Beautiful Mind, realizes that John Nash won a Nobel Prize for his game theory suggesting that such strategies lead to the best possible outcome.

Like millions of Americans currently underwater on their home, my client was reluctant to address the problem until it was immediate and one she had little chance of resolving. Banks must minimize losses and increase revenue. While Chase and other institutions grow their loss mitigation and REO departments by the thousands to manage short sales, foreclosures and a deluge loan modifications that may not work, it took one form letter by certified mail to complete a loan modification that required no documentation of income, no explanation of hardship and required no back and forth negotiations. President Obama and our current political administration are determined to help homeowners stay put, while preventing fraud, putting predatory foreclosure scams out of business, and finding an expeditious end to the housing slump. This was accomplished overnight for one customer by Chase's proactive response to the obstacle before them and a mutually beneficial strategy benefiting the greater good.

This modification would not have been possible without reducing principal. By doing so the bank minimized their loss and positioned a loan for greater chances of repayment, further they avoided one more foreclosure mitigating the negative impact on the neighborhood and their loan portfolio - a positive move for the overall housing crisis.

Like any financial matter, a loan modification should not be taken lightly and the prospects of success should be considered before you start. Banks are debt collectors and they will use the information you provide in order to collect that debt. If you provide false information to present an ability to pay which you don't really possess it will work against you if you later decide to pursue a short sale. And finally, one last time, NEVER PAY UP FRONT FOR A LOAN MODIFICATION!