The $4,500 loan mod that couldn't

Q: This isn't about a home sale exactly, but I hope you'll look at my situation anyway. I hired a loan modification company that had a very good reputation. (I'm not behind on my mortgage payments, but I wanted to have my lender extend my 5-year adjustable-rate mortgage to a 30-year-fixed.) I was very wary of getting scammed, so I asked my mortgage broker -- who has worked with my family for decades -- to refer me to a company.

The company seemed legitimate. It was associated with a law firm, and offered to give me a full refund if it couldn't get my loan modified. My boyfriend is an attorney, so he made sure my contract stated that the company would put my money in a trust account until they completed the loan modification.

Now, five months have passed. My lender told me six weeks ago that my application was rejected, and notified my loan mod company at that time. I called the company's attorney and he offered to finish the modification for me if I would pay him another $1,000 and agree not to sue! On top of the $4,500 I already paid!

He says the company is on the verge of going out of business, is already being investigated by the authorities for not being successful with obtaining promised modifications, and no longer maintains a client trust fund, so probably can't refund my money. What on earth could I have done differently?

A: In the way of due diligence, not much. I'd say you went slightly above and beyond in terms of how you selected your loan modification consultant (by referral from a trusted adviser) and the lengths you went to document a full money-back guarantee. Unfortunately, loan modification is simply one of those industries -- like the traditional real estate and mortgage industries -- in which there is a vast range of reliability and professionalism amongst providers.

Perhaps you could have checked with your state regulatory agencies (e.g., Department of Real Estate and/or Attorney General's Office), but in many states loan modification is not an activity requiring any sort of licensing -- it is regulated only if performed by a licensed real estate professional or active attorney. It sounds like your modification company's troubles with regulators have been recent, and might not have even existed at the time you were checking the company out.

Some will suggest that you should have worked with a nonprofit, HUD-approved housing counseling agency for little or no fee. While I think these groups can be helpful in modifying a mortgage, many homeowners I know have gotten more significant results from for-profit consultants. (Full disclosure here: My own law office served loan modification clients for a fee -- in the past. Back then, I urged people to try free loan modification efforts before resorting to hiring someone, even us. Now, I know better.)

The major upside of working with a nonprofit is that you wouldn't be out $4,500. In fact, if there's one critique I could make, it's that the fee seems high for a single-loan, single-lender scenario -- that might have been a tip-off, but I also understand your willingness to pay a premium to work with what you thought was an above-average provider. And even legitimate loan mod consultants charge a pretty wide range of fees, so the fee itself was not a 100 percent reliable gauge.

Others might say that outsourcing your loan modification project to anyone at all -- rather than doing it yourself -- was a mistake. But, again, I know many consumers who have tried to do it theirselves, and my personal observations have shown that those who hire effective loan modification representatives simply have a better chance at getting a good modification. ...CONTINUED

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