Loan Modifications

This is Part Three of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

Loan modifications are becoming quite fashionable at the moment.  With underwriting guidelines continuing to tighten, some folks facing financial distress and possibly foreclosure may not qualify for a refinance at the retail level, meaning, going back to the bank, credit union, or mortage broker that helped the first time around.

At the present time, loan modification salespeople are completely unregulated.  This means a person can be working at Taco Time in the morning and selling loan modifications in the afternoon.  This is similar to the situation with unregulated loan originators during the real estate bubble run-up.  Advertisements that say, “Earn Six Figures. No Experience Necessary” are now making the rounds in the mortgage lending community. (Don’t believe me? Go to craigslist jobs and do a search under “loan modifications.” Current ads are saying: Make $15,000/month and Make $5,000/day). For the consumer, this means you are once again in the one-down position and it brings me great unhappiness to tell you that at this time you cannot and should not trust your loan modification salesperson.  This problem stems from the unfortunate situation LOs face as their six figure income dried up during the subprime meltdown but their desire for a six figure lifestyle is still around.  This is a systemic problem that our government regulators seems uninterested in addressing at this time. I’m predicting mass government intervention in foreclosures anyways. Perhaps the government is not worried about loan mod salesmen because they’re going to whack them with a big ugly stick quite soon.

In the meantime, we’re stuck with loan modification salesmen. The author of this blog post is of the opinion that consumers should be extremely wary of salemen asking for an upfront fee, even if they are claiming that all or most will be refunded if the modification should fail to be approved.

A loan modification is a good choice for a consumer whose financial distress is such that they are currently unable to pay their mortgage, prefer to stay in the home and not sell (I’m assuming owner occupied property), WILL be able to pay if the loan were modified at a lower interest rate or longer term, and the homeowner is able to fully document income and assets. The idea here is that it’s in everybody’s best interest to keep the homeowner paying the mortgage, even if it means lower bank earnings. (For other options, see part 2 of this series.)

Common loan modification terms include fixing the interest rate at a lower amount for a short period of time.  3 years, 5 years, 3 years with a gradual, stepped-up interest rate after the third year, longer amortization times such as amortizing the loan over 40 years instead of 30, are very common. Voluntary, principal balance haircuts offered by your bank are not common at this time, unless you are working with an attorney or an aggressive, pit-bull non-profit housing counseling agency. Before you think that a loan mod is the answer, take a long time to consider how much interest you’ll be paying over the life of that 40 year loan.  If you’re thinking “I can just refinance later” there are many people who now have a foreclosure in their recent past, who were given that same sales pitch in 2006.

Past Predatory Lending
If you were a victim of predatory lending, your attorney can use the evidence to extract better terms for your loan modification.  FIND YOUR ORIGINAL LOAN DOCUMENTS from the last time you refinanced or purchased the home: The original disclosures and then the final disclosures you recieved when you signed papers during escrow. If you cannot find them, call any local title insurance company. Give them your address. Ask them to pull the last deed recorded against your property. On that deed, the title company’s order number will be hand-written in the margin.  Call that title company, ask them to pull your file, and to tell you who the escrow company was that handled your file.  If your escrow company went out of business, your state department of financial institutions will have information on where those files are now.

State or Federal Law Violations
If your loan originator violated any state or federal laws when originating your loan, an attorney will be able to spot this information, which becomes extremely valuable when hammering on your lender to offer you the best loan mod terms, or to even bring action that will slow down the foreclosure process, buying you more time.

Loan modification salesmen do nothing except collect a finders fee for finding and delivering you to the people who really do the work.  The loan mod company will ask you to assemble a wide variety of documents similar to when you applied for the mortgage loan.  Unless you went “stated income” the first time around.  This time it will be different.  Common documentation required includes two years of tax returns, two to six months worth of bank statements, 2 years of w-2s, paystubs for the last 4 months, a list of assets and liabilities, and a household budget showing the amount of money you CAN afford to pay on a monthly basis. The most important things lenders must analyze are 1) determining that the homeowner has zero assets/money in the bank and; 2) the homeowner’s ability to pay the modified payment.  There will be a worksheet to complete in which you will lay out your monthly budget.  This is the tricky part. You’ll have to prove that you cannot qualify to repay your current mortgage but that there is enough income coming in to qualify for a modified loan.

Legal Counsel
All loan modification candidates should retain their own, LOCAL legal counsel.  Loan Mod salesmen will tell you that attorneys will cost thousands and thousands of dollars. In one letter, the salesman is saying that attorneys will charge tens of thousands of dollars.  Wow. I’m scared now.  I’m so scared that I polled a handful of local attorneys and found that loan modification charges range anywhere from $1500 to $2500 depending on how many liens there are against the home.  In contrast, loan mod salesmen are charging anywhere from $3500 to $5000 UP FRONT and they use “a pool of attorneys” in god-knows what state. If you can’t do the math on that, then it’s time for you to think about renting.

Questions to ask a loan modification salesmen
1) What is your fee and how is it split between you, the loan mod company, and the attorney?
Failure to answer this question in a swift and forthright fashion is a big giant red flag.
2) What will YOU be doing for the fee you earn?
Listen to the answer very carefully.
3) What will the loan modification company be doing for their portion of the fee?
This question will typically be answered like this “They process the paperwork.”  Now repeat question 2.
4) May I talk directly with the attorney?
If the answer is no, find a local attorney.

Finding a local attorney
Use your favorite search engine to find your local state or county Bar Association.  Look for their “Attorney Referral Service” and seek out a real estate attorney or a consumer protection attorney. Make an appointment with a local attorney that you can talk to face to face. Trust me on this. Interview at least two if not three local attorneys. All may have a varying range of fees. Compare them with the loan mod salesmen’s fee.

Selecting a licensed loan originator to help you
In some states, it is not even possible for a loan originator or a Realtor to collect a fee for loan modification services. In Washington State and elsewhere, loan originators who work for a mortgage broker owe fiduciary duties to their clients. They are able to charge a fee-for-service (provided the fee is disclosed prior to the work being performed.)  Loan originators who are still left in the business as of this writing, are generally likely to be somewhat more competent than Taco Time/Loan Mod salesman.  But I am making an overgeneralization. A licensed LO has at the very least a nominal background in computing debt-to-income ratios and gathering documents. At this time, there are approximately zero loan orignators who have accumulated some experience performing loan modifications.  This is because nobody needed one up until about the year 2008…..the industry just refinanced you over and over again. If you select an LO who owes you higher duties, you are more likely to select someone who is conscientious of these higher duties because if you are not well-served, the LO now holds higher liability.  Fiduciary duties means that LO MUST put their client’s interests above their own interest in making a buck. They must set aside self-interest and work on behalf of you.  Hiring a loan originator to do the paperwork-gathering seems reasonable.  The loan originator MUST hand off your file at some point to an attorney.  Consumers, please demand that the attorney be local.  A fiduciary may not engage in secret fee-splitting deals. The fiduciary owes the highest degree of honesty and good faith to the consumer.  The LO/fiduciary has a duty to answer you honestly about how much of the fee goes to the LO and how much will go to the attorney.  A good scenario is to hire the LO/fiduciary to do the nominal processing work, for which you would pay a nominal “paperwork processing” fee and then pay your local attorney separately.

Working with Non-Profits
A HUD-Approved Housing Counseling Agency can help homeowners obtain a loan modification at no cost. 

Lenders charge zero to perform a loan modification.  If you’re an adventerous type that does not need hand-holding, call your lender direct in order to begin your loan modification.  I still advise hiring a local attorney to review the lender’s loan mod paperwork with you.

Currently, 40 to 50 percent of all loan modifications are re-defaulting.  This is astronomically high and will translate into higher bank losses and lost time for the homeowner to begin rebuilding his or her credit rating. This means some folks may simply need to re-enter the housing market as a renter. In part 4 of this series, we will discuss what it means to start rebuilding after foreclosure and in part five we’ll tackle what is surely ahead: massive government intervention.

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

68 thoughts on “Loan Modifications

  1. Jillayne:

    Another carefully thought out post.

    I agree with your assessment of attorney fees. I have also called a few local attys, and that’s about right, for a “typical” scenario. I’m pretty sure fees go up, if hours invested by the atty and complexity go up. I guess the consumer just has to keep good track of this on their own, and know when to say stop.

    Having an atty review an already proposed modification shouldn’t cost anywhere near $1,500. Closer to $250-500. Certainly worth that!

    I think it may be reasonable for LO’s to participate in loan modifications in the manner that you describe. Doesn’t look all that necessary in this area currently, hope it stays that way.

  2. “Having an atty review an already proposed modification shouldn’t cost anywhere near $1,500. Closer to $250-500. Certainly worth that!”

    Hi Roger, good point. Attorneys quoting around $1500-2500 were for doing the entire loan modification, from start to finish.

    I am not sure how much an attorney would charge to review the paperwork for a do-it-yourself homeowner. I imagine it would be based on that attorney’s regular hourly rate. I’ll ask around.

  3. One word of caution to the loan mod seeker.

    If you only call the existing lender, and they determine that you qualify for a refinance (not a loan mod), you may not get the best terms.

    At least traditionally, borrowers that return to their existing lender to refi, do not usually get the best deal.

    Shop around, do your homework.

  4. Dale Galvin in Mountlake Terrace. I haven’t used his services yet, but it does sound like an attractive way to do a short sale.

    He’s teaching a clock hour course at our office on November 12, 9:30 to 12:30, $30.00. I’ve only attended a short presentation he did. Anyone who wants to know how to sign up, email me:

  5. Are loan modifications offered in cases where the home is worth considerably less than the value of the mortgage? Also, how destitute does a person typically have to be to qualify for a mod?

    I have heard of cases where lenders are SOMETIMES willing to work out mods in cases where someone is already delinquent, and a foreclosure is in the offing. However, I’ve also heard that in cases where the home-owner is still making payments, and has the ability to do so, the lenders are unwilling to do a mod.

    Another question that comes up is what borrowers should do in situations where they KNOW a suggested loan modification is only a short-term solution, and that higher payments (that they know they can’t really afford) are just being pushed off further into the future? Should borrowers jump at even these short-term fixes since the alternative is losing the home? Who knows.. The economy could turn around and prices rise dramatically by the time the payments on the new modified loan rise substantially in 3 or 4 years. The government might come up with some bail-out plan that will save people in under-water homes.

    On the other hand, should borrowers generally choose the foreclosure option if they know that the only mods available to them aren’t truly going to fix their problems?

  6. Sniglet, I don’t do this work, so I don’t know, but I’d guess that any modification that reduces the amount would have a recapture provision if prices go up in the future–probably on a shared percentage basis. I’ve seen some first-time homebuyer programs that work that way.

    As to your last paragraph, there’s a third option–bankruptcy. Chapter 7 won’t help the house situation directly, but it can get rid of other debt and make the mortgage payments easier to make going forward. Chapter 13 can give the debtor a considerable time (typically 3 years) to bring a mortgage current. Unfortunately neither Chapter 7 or 13 allow the amount of the debt or the interest rate to be modified (in most instances), but that could be done in Chapter 11 (but that’s an expensive process where creditors have greater rights).

    So anyway, there are three choices–workout, foreclosure and bankruptcy.

  7. Kary wrote: “I’d guess that any modification that reduces the amount would have a recapture provision if prices go up in the future–probably on a shared percentage basis”

    Some mods likely have the re-capture clause, but I’ve also heard of others that don’t. From what I hear it seems to be related to how extensive the mod is. If they are just delaying an interest rate reset for a few years they may not have a re-capture clause. If they are making a substantial reduction in principal the odds they will want re-capture rise.

    Still, regardless of whether there is a re-capture requirement or not, the question still remains: should someone proceed with a mod that they know is only delaying the inevitable, just in the hope that a miracle happens that will bail them out (e.g. rising market, winning lottery, government bail-out, etc)?

  8. Sniglet, I’d think it would be worth the effort in many situations. Part of it would depend on how much more they were going to be paying to stay, as opposed to their other options. But avoiding a foreclosure is certainly a worthwhile goal. I’d put it ahead of avoiding a bankruptcy.

    Also, I wouldn’t describe rising market to be a “miracle.” As you probably know, I’m a contrarian. That everyone seems to think prices will continue to fall means it’s more likely that prices will start to rise. (Note that I said more likely, not “more likely than not.”) The masses are incredibly bad at knowing what’s going to happen next. (Again I’d reference the thought of many a year ago that we’d be waiting today for the inauguration of President Hillary.) That’s probably especially true now that inflation fears have subsided. That only means there’s a greater likelihood of inflation! 😀

    All that said, I think the most important thing for an owner in this situation is to get professional advice and try to determine just how deep of a hole they are in. There’s little point to trying to dig out of too deep of a hole (something that is common with people with a ton of credit card debt).

  9. @ Sniglet from comment #7:

    Q: Are loan modifications offered in cases where the home is worth considerably less than the value of the mortgage?


    Q: how destitute does a person typically have to be to qualify for a mod?

    Destitute enough to not qualify for the current monthly payment but not so destitute as to not qualify for the modified payment.

    Q: I’ve also heard that in cases where the home-owner is still making payments, and has the ability to do so, the lenders are unwilling to do a mod.

    Confirmed. A lender has no motivation to modify a performing loan.

  10. more Q&As for Sniglet (comment 7):

    Q: Another question that comes up is what borrowers should do in situations where they KNOW a suggested loan modification is only a short-term solution, and that higher payments (that they know they can’t really afford) are just being pushed off further into the future?

    A: This is a grave concern of mine. At this point, you and I both know that banks are bleeding. Modifying loans allows banks to spread the pain out over many years instead of taking massive foreclosures (and their losses) through their system during 2008.

    2008, 09, 10, 11. In 2011, when these 3-year modified loans with their low interest rates start to adjust upward, will the borrower be able to make the adjusted payment?

    Sniglet asks, “what borrowers should do.”

    My recommendation is that borrowers first review the loan modification offer with an attorney, so that they fully understand all the possible consequences of future actions, and to start considering all their options now.

    In three years, if the borrower is unable to make the new, higher payment, *another* modification is not likely going to happen.

    In other words, the bank is making the loan modification for their own benefit, just as much as it might seem as though it is for the borrower’s benefit.

  11. @Sniglet from comment 7

    Q: On the other hand, should borrowers generally choose the foreclosure option if they know that the only mods available to them aren’t truly going to fix their problems?

    A: Sometimes a temporary solution provides the gift of *time* so that a homeowner can continue… procrastinating. Yes, some will put off the inevitable.

    Others will not procrastinate and will take that gift of time and work on fixing their financial distress situation. The bank and the homeowners are going into a loan modification with a fair degree of evidence that the borrowers will be able to get back on their feet financially during those three years.

  12. From the WSJ: “Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants, marking the latest effort to try and prevent more foreclosures, people familiar with the matter said.

    The announcement could mark the government’s most assertive use of Fannie Mae and Freddie Mac to help homeowners since the companies were taken over in September.”

  13. Pingback: Fannie and Freddie to Announce Mass Loan Modification Program | Rain City Guide

  14. I’ve read through yours and other posts. So if I understand this correctly, with respect to loan modifications, If I “originate loans” either disclose, disclose, disclose or simply refer to an attorney?

  15. Pingback: Good info on mortgage relief and modification programs | SF Peninsula Real Estate Guru

  16. Jillyanne:
    Great information that I will forward to my database.
    Fortunately, the San Francisco Peninsula market reamins fairly stable and this area has not been hit as hard with the foreclosure problems as other areas in the State of California.
    Arn Cenedella

  17. Gee let’s wait another year for FNMA and FHA to BAIL us’s been working so well so far! How about that 700 billion …where is that money?
    In reality, all that “great advice” you just spewed forth… it just doesn’t work. Can homeowners do their own loan mods? sure if they are, as you say, the “adventurous type …give me a frickin break..these peole are losing their jobs, their homes and any savings they ever had and you think they can deal with these lenders???? Even if they can stand the BS and frustration they are run thru they end up with some plan that after a year of killing themselves trying to make the payments (which generally include catching up on the original back payments) they end up with a credit report that says they have been late EVERY single month for a YEAR! now please, try to tell me how these banks are helping the consumer directly! I am in the mortgage and real estate business and there are people I talk to all every day who have been trying for the last 4,5,6,7,8,9 months to get a loan mod….Countrywide just told one of my clients that “Countrywide doesn’t HAVE TO DO anything until Dec 1”. Not to mention the fact that these lenders are so overwhelmed and understaffed that unless you are already behind in payments and the foreclosure sale is a month away you are not going to get any attention. So sure if you want to be one of those people with their credit destroyed and and if you have lots of patience go ahead and deal with this by yourself. Additionally, I could do the loan modification for my client myself and charge the same fee and not be nearly as effective and it simply is not worth my time and frustration for the fees. If you and all the others like you who are so quick to assume everyone is just out to screw the poor homeowner and jump up and down about how such fees are being charged and there is no licensing requirements…well guess what …the only option they will have is to do it on their own. I have clients who have been begging me to please do their loan modification so I have finally spent the last MONTH researching companies and plans and costs etc. and still have not determined who to affliate with because I am trying to be sure I won’t get into some “trouble” with licensing. Guess what I feel like today after another month has gone by….the federal gov…still no clear cut plan. The truth is the problem is not the subprime loans…the problem is the tightening of credit and the market that has plummeted…is your house worth what you currently owe on it? Is reducing your payment by 20-30% going to really make the difference? NO ..the only thing long term that will make any difference is a reduction in the principal balance…..and guess what none of these lenders want to go there…but here is a truth for you ..when the house is foreclosed on or is sold as a short sale the lenders are taking HUGE principal reductions,. So once again it is as backwards as can be..the homeowners trying to pay their payments and keep their homes lose becuase their home values have tanked due to what the houses around them are short selling for. Why are the people who never should have owned a home and the lenders who should not be in business today (Countrywide) they are the ones getting bailed out and I have to read drivel from people talking trash about the ones of us out their trying to do something. I have been in this business since 1977 and it is NOT a “taco bell” gig for me. And by the way, like everything else, by the time they figure out some BS laws that need to be in place it will hopefully be over. Just like the Distressed Homeowner Law to help protect homeowneres from”equity skimmers”…newsflash nobody has any equity to protect! This kind of drivel is not helping solve the problem and sorry but based on what I read I am defintely not a big fan of Jillayne.

  18. Hi efox,

    Thanks for stopping by raincityguide. I recommend that you immediately begin referring your loan mod-seeking homeowners to a local attorney who can work directly with the lender. Attorneys ARE getting results for homeowners. Attorneys can do things that LOs working on a fee for service scenario simply cannot.

  19. I am researching a loan modification. Do you know anything about “A Fresh Start”. How do I know they are legit?


  20. Hi Kathy,

    I have no idea. Are they licensed to do business in Washington State? Are they trying to sell you on buying into a “system” which would entail the LO asking for money up front from a homeowner? What’s their set up?

  21. Loan Modification sounds great but sounds like just a band aid for things. Is there something that is more long term and realistic to consumers so they don’t get in the same situations?

  22. “Is there something that is more long term and realistic to consumers so they don’t get in the same situations?”

    Hi Carla,

    Yes. There are many options. Two options are selling the home and re-entering the housing market as a renter.

    With loan mods re-defaulting at a rate of 50%, we are pro-longing the recovery of the housing market.

  23. My answer to 24 would have been looking at it from an earlier stage of the process. My answer would be:

    1. Don’t get a variable rate loan or a loan that has a balloon.

    2. Make sure your loan payment is well within your abilities.

    IMHO, people refinance way too often, but even ignoring that, planning on needing to refinance is very risky. You don’t know what the future will hold. Refinancing might not be possible. And I would have said the same thing 5 years ago.

  24. Pingback: DFI Speaks Out on Loan Modifications : National Association of Mortgage Fiduciaries

  25. There’s a great article in the New York Times today on loan modifications companies that have come out of nowhere, charging upfront fees and failing to deliver on their promises:

    “Until recently, defrauders tried to bilk homeowners out of the equity in their homes. Now, with that equity often dried up, they are presenting themselves as “foreclosure rescue companies

  26. Pingback: Options for Homeowners Facing Foreclosure | Rain City Guide

  27. Pingback: Foreclosure; Letting Go and Rebuilding | Rain City Guide

Leave a Reply