I don’t do loan modifications, so let that be a disclaimer. I am, instead, an interested 3rd party who watches all these things, and here’s what I’ve found:
Modifications generally do not work. They don’t work because lenders have no motivation to modify loans. Here’s why (not all these reasons apply in every case):
- They got enough money from the Federal Gov’t to indemnify them from loss in the mortgages they are supposed to be “required to modify.” Even though modification is now a matter of public policy, they are mostly ignoring these new requirements, and the Gov’t doesn’t seem to be that interested in forcing the issue. The Federal Government was interested, when the Administration first came to office, and when the whole issue was on the front pages of the newspapers and of constant interest on the internet. Now, however, their interest has flagged, and little real effort is being made to resolve this ongoing problem.
- They can often make more money by foreclosing on the asset (YOUR HOUSE), and selling it than by “cutting you a deal,” and living with your loan for the next 20+ years, because in many cases they have insurance, and in some cases, that insurance comes from the govt who bailed them out.
- In many cases, these loans have been sold to 3rd parties, who bought them for much less than face value, as a “bulk package.” Since they purchased the loan at a discount, they can foreclose you out and make a huge profit by selling the property, and they will. The lender is not your friend, no matter what the advertisements say.
- Make no mistake–if the lenders thought they would benefit from modifying your loan, they would do it. But because they received their money up front from the Federal Gov’t, they have zero motivation to do this (my son told me today that the amount of money the banks received in actual dollars plus loan guarantees would pay off every mortgage in the US).
I have watched people try to obtain loan modifications by doing it themselves, through using a “modification company,” through working with a knowledgeable real estate broker, etc. etc. It just never works–or the offer the lender makes is patently ridiculous (“yes, Mr. Owner, we’ll reduce your interest rate, but we want to add the extra on to the back end of the loan, so that you pay it off via a balloon payment in 20 years.”). Many of these offers are frivolous–if an offer is made at all–and what’s more, many times there is ultimately no offer; they just “run you around,” and finally tell you no.
Characteristics of a good loan modification offer:
- It should reduce your monthly payment to no more than rent for that property in that area, including your taxes and insurance.
- It should reduce your loan balance to approximately the current selling price for that area.
- It should provide you with a “fixed” loan, so that your payment does not change at all over the life of the loan.
- It should fully amortize (pay off) in a 30 year term or less; if you had 15 years left on your loan when you requested your loan modification, then it should pay off in 15 years; if you had 20 years, it should pay off in 20, and so on.
Almost nobody is getting an offer like this, unless…
He does the ONE thing that you probably don’t want to do:
Go to an attorney who specializes in loan modifications. Don’t go to a general practice attorney, or a bankruptcy attorney, or any other kind but the one I have described. They generally advertise, and you may have to pay money up front. Be sure to check references, his success rate, and his standing with the Bar Association and any Better Business Bureau affiliation he may have. The attorney will often be able to get your loan’s principal reduced, he will generally be able to get your interest rate reduced and your loan placed on a “fixed,” fully-amortizing payment schedule, he should be able to get back payments forgiven, and he may even be able to get a payment moratorium if you are out of work. How can he do this, when nobody else seems to be able to do it? The secret lies in the documents you signed when you got the loan. About 98+% of the loans originated in this country have something illegal about them, because the laws are so complicated. In most cases, the buyer of the loan also buys the liabilities, and the attorneys know this. So they simply examine the documents, find the violations lurking there, call the lender, and threaten to sue. If they sue, the lender WILL LOSE, because the Federal lending laws are really quite specific about remedies (sometimes as much as 3X the amount of your invested payments, or perhaps the loan amount itself). Generally these lawsuits go quite poorly for the lender, since he has no defense. He is the one who’s broken the law. What normally happens is that these threats bring the lender to the bargaining table immediately, and he becomes much easier to deal with. You will still have a mortgage, you will still have to make payments, and keep your loan current, and you will have to watch your other credit issues with care, but the lender will probably do the three things he refuses to do when you call him yourself:
- Reduce your interest rate and payment.
- Reduce your loan principal to the value of the property (even less, sometimes)
- Make your loan a “fixed rate” loan that fully amortizes (pays off) in 30 years or less.
I don’t usually advise this, but now’s the time to get an attorney who knows what he’s doing, and let him deal with the lender. This is one instance where “do it yourself” does not work.
Questions? Call me or write me (see the contact page). If you’ve decided to sell rather than fight, and you’re in the San Diego area, I can help. Otherwise, I will help you however I can.
