Loan Modifications - The odds are against you

Based on the facts and our client's experience, its our opinion that loan modificaions are hard to get and not keeping up with California's foreclosures.

Obama’s Making Homes Affordable program has increased excitement about loan modifications. The unfortunate truth, according to the U.S. Treasury Department, is that only about 9% of the people who need mortgage relief are getting it through the loan modifications with the government's Making Homes Affordable program or otherwise.This means that 91% are NOT being helped.

Loan Modification Statistics 

For more information about MHA go to www.makinghomeaffordable.gov or consult a HUD or Hope loan counselor regarding your particular situation.

As an overview, this Government plan targets those who deserve help rather than attempting to reduce foreclosures and stabilize home prices. Those that “deserve” help are basically those who qualify under MHA’s regulation and are considered “eligible”. The program does not address or handle “negative equity” (more owing on the property than it is currently worth) and it focuses entirely on the ability of the homeowner to pay their monthly payments. The major tool is reducing the interest rate.

  • A San Diego law firm that does loan modification cases, reported that out of the 600 cases taken, only 30 cases had been closed. This means that only 5% of the loan modifications they are doing are successful!! A San Diego real estate group that does loan modification reports only a 10% success rate.

The Problem with Loan Modifications

We have had many homeowners come to us after their property was foreclosed on when there were in the loan modification process. These people believed the foreclosure sale would be suspended or stopped because they were applying for a loan modification. To their surprise they got foreclosed on and came to see us after the foreclosure sale. Don't delay, come see us for a free consultation before the date of the Trustee's Sale. A loan modification is hard to get, takes time and may not result in much help to making the mortgage affordable. Here’s why:

  1. A loan modification is an agreement between the lender and the borrower wherein the lender agrees to modify (change) the terms of the loan. Such changes can be that the interest rate is reduced or that there is a permanent reduction in the amount owed or that the current arrears are allowed to be added to the balance of the loan.
  2. Loan modifications are voluntary on the part of the lender. They do not have to do one; however, the government is putting pressure on the lenders to grant more loan modifications. But even with guidelines and regulations, a bank can do the minimum or figure out a reason to deny a loan modification.
  3. Most loan modifications that are approved only temporarily reduce the interest rate and payment; they typically do not reduce the principal amount owing on the loan. This is called a rate reduction.
  4. Several loan modifications are made on a “trial period”, some lasting for as little as two months. During this period of time, the borrower makes an initial payment and several monthly payments. The bank investigates the paperwork that the borrower submitted to determine if the homeowner is “eligible”. The borrower, in good faith, makes the payments but does not know if a loan modification will be granted or what will happen after the “trial period” is over. This again is risky and uncertain.
  5. Recent articles have proven to be consistent with what our clients tell us about loan modifications and how they are difficult to get. Most of the people we see in our office have been denied a loan mod or a short sale. Loan modifications are hard to get due to a “darned if you do and darned if you don’t” philosophy by the banks. If someone makes too much money the bank can say even though you owe more than the property is worth, you can afford to make the payment - loan modification denied. On the other hand, if a person or family makes too little money the bank can say you don’t make enough money to afford the mortgage payments - loan modification denied. In either case the loan modification is denied.

A recent study on loan modifications re-default rates shows that:

Re-Default Rates of Loans Modified in 2008 (60 or More Days Late)

This means that a large percentage of loan modifications do re-default, even if the mortgage payment was reduced by 20% or more!

Changes in Monthly Payments for Loans Modified - 2008

This is a breakdown of how mortgage payment amounts are affected by loan modifications. This explains that only 41% of loan modifications actually reduced the mortgage payment amount.

More About Loan modification Eligibility

  1. Property must be owner occupied. Investors not eligible.
  2. Maximum first mortgage amount of no more than $729,750.00 on single family dwelling.
  3. To be eligible you have to document “financial hardship” including providing income tax returns. Financial hardship is defined as monthly housing expenses of: first mortgage, real estate taxes, property insurance, and homeowner’s association fees that are more than 31% of gross income.
  4. Junior mortgages (second or third or home equity line of credit) are not considered and these loans are not modified as part of this program.
  5. The first mortgage is not reduced to the value of the property.
  6. Ignores negative equity-- does not consider negative equity as part of the loan mod program.
  7. Under this program the interest rate is TEMPORARILY reduced to a level where payments for the first mortgage, real estate taxes and insurance do not exceed 31% of your gross income. This is a temporary interest rate reduction.
  8. Reduction of the principal amount owing on the first mortgage is a LAST RESORT and only done to get the payment low enough to be affordable. Reductions in principal are made only in extremely few and rare circumstances despite the Obama MHA Plan.
  9. The government will give special financial incentives to servicers to put borrowers in the program; and the government will also compensate the borrower and the servicer for the borrower staying current while in the program.
  10. You have to decide if the loan mod is worth it and if you can afford all the payments.

See www.mortgagereliefonline.com from FICO for more on eligibility.

Additional Mortgage Reduction Procedures

In addition to these government programs, there are additional procedures that may be available to you to reduce mortgage payments on junior mortgages (second, third and Home equity lines of credit) that are not covered under the MHA plan. Call for a consultation to discuss your situation and the availability of additional options.

Eliminate 2nd & 3rd Mortgages Through Chapter 13 Bankruptcy

Lien Stripping is a very powerful and helpful tool within Chapter 13 Bankruptcy Law for homeowners in or near foreclosure. In many Chapter 13 cases we can completely eliminate 2nd & 3rd mortgages and Home Equity Line of Credit, this is called “Lien Stripping”. In order to do so the value of your home must be less than the amount you owe on your first mortgage.

Chapter 13 is a Debt Repayment Plan that consolidates (puts together) all your debts into a Payment Plan. The Plan gives you up to five (5) years to get caught up on back mortgage payments and other debts by repaying creditors what you can afford. “Lien stripping” (elimination of mortgages) means that upon successful completion of your Chapter 13 the mortgage company will have to remove the junior mortgage(s) from your property and the arrears on the mortgage(s) don not have to be paid back. This can be enormously helpful with keeping your house.

The reason behind this is that the lien stripped loan will be converted from a secured debt that is required to be paid in full to an unsecured debt through the bankruptcy. Unsecured debts are not required to be paid in full in a Chapter 13. In fact, most of the time in recent Chapter 13 cases, the unsecured debts are paid nothing. This is completely legal and is done with Court approval. This can be a great benefit for you as the junior mortgages can be removed and NOT paid according to your Chapter 13 Plan.

This reduces your mortgage debt and reduced your mortgage payments. What can be better than to eliminate mortgage debt? This is what we like to call the “Ultimate Loan Modification”.

Foreclosure Defense

Filing a Chapter 13 bankruptcy case with the Bankruptcy Court stops the foreclosure and all other creditors immediately. Chapter 13 is a Debt Repayment Program that gives you up to five (5) years to get caught up on back mortgage payments; it also includes a plan to handle any and all other debts by repaying creditors what you can afford. In certain circumstances we may be able to completely dissolve a second or third mortgage and Home Equity Line of Credit. We call this the Ultimate Loan Modification. What can be better than to legally eliminate those kinds of mortgages?

  • Within Chapter 13, the interest rate on back mortgage payments is currently 0%

Sometimes we can completely eliminate unsecured debt, such as credit cards, medical, judgments and any other debt a person has.

  • Interest on credit card debt is usually 0% in Chapter 13
  • No points or loan fees in Chapter 13 as it is a debt repayment program, not a loan

Since it is a repayment plan it is often a good solution for those who want to keep their property and have enough income to afford it.

Filing a Chapter 7 bankruptcy also immediately postpones the foreclosure sale of your house and wipes out mortgage debt. Typically you can stay in the property longer as filing a Chapter 7 postpones a foreclosure of your house. It does not save the home unless you can become current with your mortgage very quickly. Usually people eventually lose their home in foreclosure, but Chapter 7 eliminates (discharges) overburdening debt. When the Chapter 7 is over (usually 4 months) your debts are discharged and you get a fresh start. You may be able to keep all or most of the property under Bankruptcy law.

Chapter 7 Bankruptcy is typically for those who:

  • Cannot afford the mortgage payments, real estate taxes and have significant other debt
  • Owe more on the mortgage(s) than the original purchase price of the property
  • Have a junior mortgage(s) and the 1st mortgage is foreclosing or has foreclosed.

Chapter 7 legally eliminates almost all debt, including personal liability on first, second, third mortgages and Home Equity Line of Credit (HELOC). Chapter 7 is appropriate when the homeowner: 1. cannot afford their mortgage payments and has significant additional debt, 2. owes more on the mortgage(s) than the original price of the home, 3. has a second or third mortgage or Home Equity Line of Credit on the home and the first mortgage is foreclosing or has foreclosed, 4. current income does not exceed the amount allowed under the new bankruptcy laws, 5. has burdensome credit card and medical debt that can’t be repaid, 6. Is suffering harassment by creditors and collectors.

The Foreclosure Process

In the foreclosure process the lender has the right to sell your property at a public auction in order to collect on the delinquent loan. The foreclosure officially starts when the lender records a “Notice of Default”. If the missed mortgage payments, penalties and foreclosure fees and costs are not paid in full within three (3) months, the lender has the right to put your property up for sale. The lender then records a “Notice of Trustee’s Sale” and posts it on your property in which it can be sold at a public auction a minimum of 20 days later. After the foreclosure sale, you do not own the home.

Whoever buys the property has the right to re-sell it and keep all the proceeds. Whether the lender gets the property back, or a third party buys it, you will be required to leave the property. If you fail to do so after the buyer’s request, the buyer has the right to file an eviction lawsuit, called Unlawful Detainer, and the Marshall can remove you from the property.

There can be income tax consequences and personal liability on certain kinds of mortgages if you lose your property in a foreclosure sale. Get good legal and tax advice at the beginning of the foreclosure process so you know your rights and the consequences of your particular situation.