One of the main support legs in the Obama administration’s Making Home Affordable program announced earlier this year has been loan modification, but the process has been dogged by controversy and undermined by scams. Yet, advocates still believe if the applicants can survive the cure, some financial healing can be achieved.
Loan modification should not be a phrase subject to interpretation. It holds a hard and fast technical meaning: a permanent change in one or more of the terms of a borrower’s loan, allowing the loan to be reinstated, and results in a payment the mortgagor can afford.
The government’s plan looks fairly simple; it wants loan servicers to bring monthly payments down to 31 percent of pre-tax monthly income. To do that, the government will subsidize the process, providing participation incentives for all parties, servicers, borrowers and even mortgage investors.
Part of the complaints about the program is that it is too limited. The basic parameters are as follows: the home has to be a primary residence; the amount owned on the first mortgage has to be equal or less than $729,750; the mortgage needs to have been originated before Jan. 1, 2009; and the monthly mortgage payment must be more than 31 percent of gross (pre-tax) monthly income.
"The program the Obama administration came out with is directly associated with Fannie Mae-type loans, but the majority of loans that are struggling are nonconforming, Alt-A and subprime loans. The Obama administration hadn’t done anything for those types of borrowers," says Andy Firoved, a co-founder of Homeowner Toolbox Inc., an Irvine, Calif.-base loan modification consultant.
"It’s not only that Obama’s program is limited to Fannie Mae-type loans, but the other part of it is, no one has really embraced the program," Firoved adds.
Like other government programs such as HOPE for Homeowners, the program is not mandatory for servicers. It does set guidelines and offer a few carrots as incentives, but so far it seems the major lenders haven’t gotten in line behind Making Home Affordable. This isn’t to say that major lenders, which are also the biggest loan servicers, are eschewing loan modifications; most have their own programs. Indeed, about 1.3 million loans were modified between 2007 and January 2009, reports CNN Money.
Unfortunately, the servicers are also part of the problem. As a borrower you dial into the company that now services your loan. The odds are you’ll get a recent hireling brought in at a low wage. Hopefully, this person will be well-trained and will assiduously go through a series of questions, eventually suggesting all things are possible for a loan modification. You beam in joy, only to find out you are actually dealing with a deep bureaucracy and if lucky, you may see a resolution in a mere six to 10 weeks and that’s after calling almost daily and faxing hundreds of pages of support.
Even if you get the loan modification, you are still not assured of success. An April report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision noted that "re-default rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest re-default rates."
Is it any wonder that loan modification has engendered a whole new industry, loan modification consultancy, along with a scary, parallel industry, loan modification consultancy fraud?
Even the government Web site, www.makinghomeaffordable.gov, has a section called "Beware of Scams," with these helpful hints: there is never a fee to get assistance or information about Making Home Affordable from you lender; beware of any organization that asks you to pay a fee in exchange for modification of a delinquent loan; beware of anyone who says they can save your home if you transfer over the deed to your house; and never submit your mortgage payments to anyone other than your mortgage company. …CONTINUED
Specifically, in regard to loan modifications, the most common scam involves people or organizations that charge high fees of $2,000 to $4,000 to help with the process, and then abscond or do minimal help.
I asked Moe Bedard, founder of www.LoanSafe.org, what was going on. Bedard, often quoted in the financial press, should know a few things about illegal activities, having a very checkered past and being an object of disquieting remarks on some of the mortgage blogs.
"So, which Moe am I talking to," I began, "the good Moe or the bad Moe?"
He assured me it was the good Moe, and I think he was right because he left me some helpful hints. First, he says, if you don’t have any income coming in and you’re unemployed, forget about getting a loan modification — it just won’t happen.
On the other hand, if you meet the qualifications, get your documents together, write your hardship letter and call your mortgage servicer, then get ready to beat your head against the wall for six to eight weeks. But, be assertive, because the squeaky wheel gets the attention. "If you are the person who gives up easily, you most likely are not going to win," he says.
Bedard also recommends going through the process oneself instead of hiring anyone. However, once the modification is complete, it should be reviewed by an attorney.
I also asked Homeowner Toolbox’s Firoved if he had any helpful hints he wanted to impart. He had two, and they were both surprises.
First, he says, when people fill out forms they generally embellish, trying to make the case of very real hardship. So, if the electric bill is $355 a month, they might write $400. Eventually, all these embellishments add up and in the end it appears the applicant is negative on bills every month. Well, here’s the surprise: The servicers want hardship, but they want to see easy hardship. They are more inclined to do a loan modification if the applicant is positive on monthly bills instead of negative.
Secondly, if you were applying for an original loan and mentioned that you had a boarder, perhaps your adult son, who was paying a monthly fee, which would help pay the mortgage, this would be viewed as a negative by the mortgage company.
On the other hand, in a loan modification situation this extra income would be deemed a positive. You may not be so happy your adult son has come back to live with you, but the mortgage servicer appreciates his contribution.
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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