Loan modification fever is here. Families all over the U.S. are struggling to make their mortgage payments and many are expressing frustration that their lender won’t modify their loan. Any of us could try to make a rational argument that a lender is better off modifying a mortgage loan instead of foreclosing but this is a simple answer to a complex problem. This blog post will help homeowners understand who is not going to get a loan mod. Hopefully homeowners will be able to then move forward toward other solutions.
Loan modifications are not for people in temporary financial distress. Temporary financial distress is when a homeowner missed a payment for one or two months because of a temporary hardship. Lenders can and do help these folks with a forbearance and repayment plan where the missed payments are made up over time or tacked on to the end of the mortgage. This is not a loan modification, it’s a repayment plan. If your financial distress is only TEMPORARY then asking for a full-on loan mod is wasting your time and everyone elses time. New research out this week from CR shows us that 30% of all delinquent borrowers self-cure without receiving any kind of loan modification. This means lenders who can effectively triage out borrowers likely to self-cure are behaving rationally by setting aside pleas for loan mods.
Long term financial hardship means homeowners need long term financial solutions. A loan modification is only ONE of MANY long term solutions. In order for a homeowner to receive a loan mod, the homeowner must be able to document stable monthly income. Lenders have to re-underwrite the file to make sure that the loan modification will not result in further loss to the lender. This takes time. If a homeowner’s monthly income has dropped so low, to the point where they really can’t qualify to repay the modified loan, this loan modification will not be approved nor should it. (Note: Lender guidelines on qualifications vary and change often, just like the retail side of lending.) This homeowner should consider other options which will be outlined below. It should be beyond clear by now that lenders are not going to voluntarily start reducing principal balances unless forced by gunpoint. The government can try to shame them into it but let’s face it: most corporations are shameless and nothing any of us say and do is going to change this.
Long term financial hardship cases do happen. Case in point. I received an email last night from a homeowner who is on permanent disability. Her husband just got laid off. They are seeking a loan mod. In no way can they afford the $4500/month payment on their interest only loan so they’d like the lender to lower the payment (lower the interest-only rate, extend the term). They are $100,000 negative equity. Sounds rough, doesn’t it? However, they happen to have $250,00 in the bank. This is not a case of financial hardship! A lender would be wasting time and money modifying this loan. These homeowners HAVE MONEY in the bank to continue to make their existing payment for many more months. Besides, looking at the amount of money coming in the door each month, once their money runs out, chance of a re-default is sky high. The only thing a loan mod does for these homeowners is it keeps them in their home for a little while longer. If the husband can become re-employed at his same rate of pay, maybe the chance of default drops a bit, but no lender will modify this loan if there’s literally zero money coming in every month. This lender is making a good business decision to put this file on ice while they continue to pay as agreed each month using their $250K.
I agree with CR: “If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.” It would be rational for negative equity homeowners to make the decision to trash their credit score in exchange for a shot at wiping out $50K, $100K+ negative equity if they wanted to keep their home. We shouldn’t hold our breath for lenders to make principal balance reductions en masse.
I have not worked in loan servicing for many years but when I did, there was a triage system of making sure cases that were going to cost the bank the most money were prioritized over cases that could wait longer. We already know that loan servicing departments are far understaffed for the tsunami that’s hitting them full on. If we want banks to beef up staffing and spend money hiring and training more loss mitigation underwriters, the expense for these costs is going to be priced into new mortgage loans made tomorrow and in the future. Even so, this will take time. Working in loan servicing is a very high stress job. Imagine what it’s like to work 8 to 5 every day with a 1 hour break from lunch and 2, 15-minute breaks…with the rest of your day spent being yelled at by Realtors asking for their short sales to be approved RIGHT NOW. High stress = high turnover. I could never do that job today because I’d yell back and surely get fired.
Homeowners with bonafide cases of lender law violations or predatory lending can and should be prioritized in getting help modifying their loans. These homeowners are better served by hiring competent legal counsel to represent their interests in negotiating fair and just mortgage terms. But that’s not what’s happening today.
Today, it seems that the masses believe they deserve a loan mod based on whatever is going on in their lives. Job loss, reduction in hours, on and on….I know I may sound heartless here but lenders need to make sure you are able to repay a modified loan and that you are eligible for a loan modification under their specific guidelines. Not everyone will qualify.
Options beyond a loan modification:
Move out of the house
If you don’t want to sell the home, perhaps you will be able to rent out your home and cover or almost cover the mortgage payment. Then you can seek out other living arrangements that comport with your ability to pay. When your income adjusts upward again, you can move back in.
Take on a tenant
Maybe you can rent out your basement or spare room to a tenant. I know several people who are doing this just so that they can make their own mortgage payment. Check your local city or county rental guidelines.
Sell the home
If you have negative equity, interview at least three real estate agents who are COMPETENT in the practice of listing and selling short sales. Do NOT hire an agent who has no experience in short sales. If you decide to hire a Realtor who’s your friend or relative and that person has no experience listing and selling short sales, you get what you deserve.
Hire an attorney
Some homeowners seek out a loan modification only to find out that the real problem was far beyond just the mortgage but instead was an abundance of consumer credit card debt. Maybe an appointment with an attorney who represents debtors is in your future. An attorney can fully explain all the reasons for and reasons against letting the home go to foreclosure, as well as all the legal consequences. News today suggests a foreclosed homeowner might even be able to rent back their home from the lender!
Whatever you do, do NOT pay ANYONE cash up front for services before the services are actually performed (with the exception of when you hire an attorney.) If you part with cash to pay a loan mod company, you are setting yourself up to become re-victimized. They will tell you anything you want to hear in order to get your money because they know you are desperate. If you have money, hire your own attorney who will represent you directly. If you do not have money, contact your state’s bar association for a referral to free legal aid.
Also worth saying: Avoid any third party who claims to have a solution to all your problems and asks you to sign anything. Especially if they say, “This is perfectly legal.” Before signing anything hire your own local legal counsel. Foreclosure rescue scams continue to be on the rise nationwide.
Not everyone will qualify for a loan mod and not everyone is going to get their loan mod processed in a timeframe that the majority would consider anywhere near “good customer service.” Loan servicing doesn’t have to provide you with good customer service because you have no where else to go. There is no automated underwriting slam dunk approval system for loan mods. There’s no stated income program for loan mods. Real humans underwrite the file and this takes time. It’s going to take many, many years to work all the bad loans out of the system. We are in for a long ride. If you don’t qualify for a loan mod it might be time to move on to other solutions.