Don't put all eggs in loan mod basket

Q: I applied for a loan modification at the very beginning of the year. It's almost the end of the year, and I still don't have an answer from the bank. I haven't been making the mortgage payment this whole time, but I haven't received any sort of notice of default or foreclosure. The bank keeps telling me to wait, and saying that the "investor" who owns my loan is taking up to six months to make a final decision on loan modification applications. Could this possibly be true? I want to get back on good footing and I feel like I should be doing something. Any advice?

A: You're right to feel like you should be doing something -- you should be paying your mortgage! OK, so that's a seriously oversimplified view; let's get down to brass tacks.

Mindset Management

You're clearly aware that every month the chasm between you and getting current on your mortgage grows wider and more difficult to span. Hopefully, you've been a wise steward of the income you would normally allocate to your mortgage payment. I've seen people save these funds; I've seen others use them to pay down their other bills; and I've seen still others literally arrive at the end of a yearlong stint of making no mortgage payments with no savings and nothing else to show for it.

I've known a number of people who get to the end of a long loan modification process only to have their lender decide that if, after many months of nonpayment, the borrower did not have the funds at their disposal to make 1-3 months' worth of mortgage payments as a good faith deposit on their modification, that indicates that they probably cannot afford to keep the home in any event. The borrowers who have saved their money can say with assurance to their lender at that juncture: Make that initial payment a condition of my loan modification, and I'll take care of it right away. The borrowers who haven't saved any money are hard-pressed to make a case that they can, in fact, afford the home, if they haven't been able to save even a single month's mortgage payment after months and months of nonpayment.

By way of surprise prevention, I would encourage you to make sure you are tucking away as much cash as possible. Yes -- your lender will ask for your updated asset account statements and will see those funds there. While that might have been a no-no in earlier schools of loan modification thought, the reality is that it might also convince your lender that you can actually afford to be a homeowner. And if your lender doesn't approve your application for a significant modification, it will give you the cushion to either bring down your arrearage or negotiate for time to get current. You might need it.

Need-to-Knows

I know of people who have received an answer on their loan modification in two weeks. I also know of borrowers like you who are still, after eight months, waiting for an answer on their application. As you probably know by now, many mortgages originated before 2006 were sold in packages to investors like pension funds, foreign banks and even individuals. If your mortgage company is only servicing your loan for an investor like this, your loan modification application process could very well legitimately take as long as the investor takes to get to your file.

For about the last 18 months or so, the advice on how to "fix" your broken adjustable-rate mortgage (ARM) in a market where declining values rendered refinancing infeasible has changed, oh, about every 10 minutes. There definitely was a time when the prevailing school of thought was that falling behind on your mortgage was the best way to "motivate" your mortgage lender or servicer to modify your loan. ...CONTINUED

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