First American Core Logic’s 2009 2nd quarter report reveals that more than one third of all US mortgages are currently underwater and nearly one half of all US mortgages are projected to be by 2011. It’s happening to our friends, our neighbors, and even to some of us. On a daily basis, I receive calls from homeowners who are facing this dilemma and don’t know what to do. They are confused and unfortunately there is a lot of bad information circulating. There are also scam artists who prey on people’s desperation and then strip them of their hard earned money. In some cases, they even scheme to take people’s homes away.
The most common solutions for homeowners who owe more than their homes are worth are: riding it out if you have a fixed rate and can still afford the payments, loan modification, streamline refinance (if your loan is owned by FHA, Fannie Mae or Freddie Mac), short sale, deed-in-lieu, and as a last resort, judicial foreclosure. In this article, we will discuss loan modifications.
The words “loan modification” have unfortunately become synonymous with the words “scam,” “rip-off,” “shady,” “fly-by-night,” etc. And, if you’ve been following the news lately, you have witnessed the negative press that loan modification companies have received. With the demise of the real estate market and the economy, companies began springing up on every street corner and their ads seemingly monopolized every freeway billboard. “STOP FORECLOSURE,” “SAVE YOUR HOME” they advertised and unsuspecting homeowners responded by the thousands, looking for hope in what many had resigned to as a hopeless situation.
So what is a loan modification? Simply put, a loan modification is an agreement by your existing lender to “modify” the terms of your existing loan to more affordable terms. In most cases, a modification results in a reduction in interest rate and/or an extension of the repayment period (i.e. 40 years instead of 30). Rarely, lenders will also reduce your principal balance depending on their investor guidelines and whether or not they are participating in the Hope for Homeowners program.
Although there were and still are some companies that operate with integrity and truly look to serve others while simultaneously earning an honest living, most of the modification companies were simply looking to exploit people’s desperation and make a quick profit. Many of them also operated out of compliance and broke the law.
Fortunately, the DRE (California Department of Real Estate), and the FBI have been going after the unethical and non-compliant companies with a vengeance. The DRE has also posted a consumer alert on their website citing California Civil Code Section 2945 (which regulates “foreclosure consultants”). It forbids anyone who falls under the definition of a “foreclosure consultant”, as well as a real estate licensee, from collecting any advance fees for these types of services if a Notice of Default has been recorded against your property. The DRE also goes on to say "If your lender has recorded a notice of default, do not pay an advance fee to a real estate license, or to any person or entity. California licensed lawyers when rendering services in the course of their legal practice(s) are exempt from this prohibition. There are non-profit agencies that can assist you without charging you a fee and real estate licensees who can represent you for a fee to be paid after they have completed their work."
In order to qualify for a modification, you need to demonstrate financial hardship and insufficient equity which would prohit you from being able to either refinance or sell your home and net enough proceeds to pay off the mortgage(s). Having said that, if you strictly have negative equity and cannot cite a coinciding financial hardship, do not waste your time as lenders do not consider negative equity in and of itself a determinant as to whether or not a loan is at risk of default. Some possible causes of financial hardship could be: reduction in household income, illness, death in the family, layoff, a loan that has or will be adjusting soon, thereby making the payments unmanageable. Lastly and most importantly, you must be able to provide documentation showing that you can make the proposed modified payment.
For homeowners who have experienced or are currently experiencing financial hardship, are upside down on your home, and feel that a reduction in mortgage payments would enable them to stay in their homes, a loan modification is worth looking into. Start by contacting your loan servicer. Request their modification package and ask them what their timeframes and guidelines are to be considered for a modification. From there you should receive a questionnaire and budget worksheet to complete and now you have a few choices: doing it on your own, getting the free help of a HUD-approved non-profit agency, or hiring a private for profit modification expert such as an attorney or a DRE approved professional.
If you opt to do it yourself, here are a few useful resources:
• The FDIC offers its IndyMac program "FDIC Loan Modification Program Guide — 'Mod in a Box'" for free. The program information specifically targets lenders, but contains a homeowner sample agreement, instructions, frequently asked consumer questions and other useful materials.
• The PMI Group, Inc. offers a free Mortgage Options Assessment Tool on its HomeSafePMI web site. According to PMI, the tool "enables homeowners to organize, calculate, and produce reports on their current financial situations prior to meeting their lenders or counselors to discuss solutions to foreclosure."
• The CMPS institute has some valuable information on its website, including a very powerful sample letter to send to your lender along with all of the other required documentation. It cites the laws and civil codes that the banks must adhere by when considering whether or not to modify a loan.
If you would like the free assistance of a HUD-approved non-profit agency, Home Free-USA has a great track record.
Finally, if you decide to hire a private firm or an attorney, do your research on Google and the DRE website, request and check references, and do not agree to any advance fee arrangements.
The next article in this series will discuss Fannie Mae and Freddie Mac Streamline refinances as potential options for homeowners who are underwater but currently have loans that are owned by Fannie Mae or Freddie Mac.