Know the feeling when you realize something has gone horribly wrong? Your stomach drops, pulse quickens and your breath is short. Everyone is familiar with the feeling. Imagine opening a letter from your lender that reveals your loan modification was denied and your home will be sold at the foreclosure auction the next day. Although not uncommon it is unfortunate. Particularly because the loan modification offered by the bank was framed as a solution to the problem. Instead it was more of a distraction than a lifeline.
This lifeline came in the form of a mortgage loan modification from your lender. And they’re offered by most lenders. If approved, the homeowner gets to keep their house and the loan stays in place. It seems like a win, win. What seems too good to be true is often just that. Loan modifications are no different.
The most important thing to remember about loan modifications: they are a long shot to be approved.
What is a mortgage loan modification?
They are presented when the borrower is unable to make payments on a loan due to a financial hardship. It could be the result of unemployment, illness, disability, divorce or death. A mortgage loan modification is a change in the terms of the original loan. It is designed to reduce your monthly payment to an amount you can afford. This is not a refinance. In the case of a refinance the borrower has credit to get a better interest rate or cash out their equity. They have a clear payment history. However, borrowers facing financial hardship as described above are ineligible to refinance due to missed payments.
Where did they come from?
Loan modifications increased in popularity following the sub-prime mortgage crisis of 2008-2009. The Home Affordable Modification Program (HAMP) was introduced as part of the Emergency Economic Stabilization Act of 2008 and was designed to stem the tide, rather tsunami, of foreclosures. It allowed homeowners to keep their homes if they qualify under the guidelines set forth under HAMP. The guidelines set forth by HAMP are pretty simple. You can find them here. Loans under Fannie Mae and Freddie Mac are required to follow HAMP guidelines while other lenders have the option to participate. The intent seemed credible enough but the execution left something to be desired. We’ll get into that later.
Loan modifications come in several varieties. There are repayment plans, balloon payments, interest rate reductions, extended amortizations, principal reductions, partial claims and in many cases a combination of these are combined to form the finished product.
Now to the tricky part. The government’s modification program was destined for failure and here’s why: the program is voluntary for lenders and they’re allowed to manage the process. This led to an incredible number of failed modification applications. According to Gretchen Morgenson of the New York Times, Citibank rejected an eye-popping 87% of applicants while JP Morgan Chase denied a modest 84%. Keep in mind we’re talking about borrowers who are facing not only financial hardship but also emotional hardship.
Now to the “process”
This is where the bank’s control of modification has done the most harm. It is mysterious, onerous and complicated. And according to Jacob Inwald, director of foreclosure prevention at Legal Services NYC, a loan-mod application is “virtually never” evaluated properly the first time. This could be due in part to the massive amount of paperwork borrowers are required to submit. According to Gregory Hebner, president of the loss mitigation outsource company MOS Group, they receive 54,000 pieces of paper every day from 3,000 borrowers.
Borrowers are required to submit paycheck stubs, bank account statements, tax returns, a hardship letter describing the reason(s) for their delinquent payments and any other documents the lender requires. According to Marcie Geffner of Bankrate.com, “If even one document is missing or outdated, the entire file will drop to the bottom of the pile.” And I just mentioned the size of that pile. Also, don’t rely on the bank to tell you what’s missing, they’re just going to deny the modification due to insufficient documentation.
Once a borrower has submitted all the required documents the file has moved to the evaluation process. The evaluation typically takes 30 days once all the documentation is submitted.
Now let’s assume the evaluation period is complete and the lender has confirmed the borrower is eligible. At this point most lenders will have them start a trial payment plan. This part of the process typically lasts 90-120 days. The lender will determine a monthly payment and the modification approval depends on the borrower making these payments in full and on time. If the borrower has made all the payments in a timely manner then the lender may choose to finalize the terms of the modification which could take an additional 60 days. The total process, if completed without flaw, will take a minimum of 5-6 months. I’ve personally met with homeowners in the Austin area who’ve been in the process for 2-3 years.
There is a way to manage the lender’s progress through the evaluation process. Call them, constantly.
Ever called loss mitigation? Here’s what it’s like.
Some lenders will provide customers with a “single point of contact” or “preservation specialist” to make them feel like they’ve got a dedicated person to help them. In reality this person is assigned to hundreds of people and getting them on the phone is a lottery. What is more likely to happen is to call and have to enter several numbers into an automated messaging service that will confirm your identity. Then after 5+ minutes of horrible music you’ll be routed to your representative who will be busy with another customer. Next you’ll have the option to be routed to another customer service agent or leave a message with your rep. Neither of these are good options, they are just alternatives. Leaving a message with your rep will ensure a call back in the next couple days, but when faced with the possibility of losing your house this is not the immediate response you need. Speaking to a different person is what I recommend. After another 5+ minutes holding you will talk to someone who may be able to help in the most minimal sense of the word. They will most likely not be able to perform any important tasks for you but they should be able to check the status of your file and pass on relevant information to your assigned rep.
The process is designed for the borrower to fail, and they do at a rate of greater than 80%. Borrowers will find no empathy from lenders. As a borrower, you will be subject to submitting, resubmitting and monitoring the status of paperwork required for the evaluation process. You will not meet with a person face to face. You will be subject to the lender’s timeline. You will be subject to ambiguous acceptance standards. You will be subject to the lender’s rules because they were allowed to make the rules. You are simply a number on a spreadsheet that owes money and the goal of the lender is to get that money back. If they can’t then they will start the process of seizing the asset securing the loan, in the case of a mortgage, your home.
Lenders can mislead borrowers by considering a loan modification while simultaneously executing a foreclosure. This is known as dual tracking and can lead to heartbreak for homeowners. Homeowners I’ve spoken to unanimously assume the loan modification process meant an automatic halt of the foreclosure process. HAMP requires lenders to temporarily suspend foreclosure but this is not always the case. Remember, not all lenders fall under HAMP’s guidelines and even if they do, they don’t always follow the rules. According to the law firm Parry Tyndall and White, “banks have foreclosed on applicants that qualify under HAMP standards by sending a denial letter on the eve of a foreclosure sale”. There are a couple explanations for this. First, most mortgages are originated by large corporations with separate departments for foreclosure and loan modifications and they likely don’t alert the other of the loan status. Unless you make them! Or in a disturbing number of cases the lender will mislead the homeowner by explaining that the foreclosure has been postponed and going through with the foreclosure regardless. Another important point to remember, lenders under HAMP are required to present the loan modification as a solution even if they know it will be denied. In order to determine if the home is proceeding through the foreclosure process the homeowner must call the lender and ask if the house has an active sale date. If it does then the foreclosure process has not been postponed.
For most borrowers home ownership is part of their identity. There are memories and emotions that make letting go of a home impossible for some. This can create another problem for those who’ve already found themselves in financial turmoil. There are situations where the best possible outcome is selling the house to relieve the debt. Loan modifications are for those who are facing a temporary drop in income. Emphasis on temporary. They are meant to get a borrower back on track, not to be a solution to a permanent income loss. Everyone wants to keep their home, and there is nothing wrong with that sentiment. But when foreclosure looms, letting go is the best case scenario. If you think the loan modification process is frustrating try not being able to own another home for 10 years because of the ravaging effects of foreclosure.
Another important warning to borrowers: once the foreclosure process is initiated by the lender your information is public record and that makes you susceptible to scammers. There are dozens of companies out there looking to take advantage of people in a vulnerable situation. I have seen two recent examples of companies that are posing as affiliates of the lender providing “processing services”. They instead take a monthly payment that is less than the mortgage payment which they lead customers to believe will be applied to their unpaid balance. It is never applied to anything but the company’s bottom line.
How do you increase your chances of success?
There is only one approach that will ensure a borrower’s best chance at loan modification approval. Pay attention to every single detail. Fill out every blank space on every document required by the lender. Make sure each document is pristine and legible. Once paperwork is submitted, call the lender and have them list each document they received and make sure it matches what was submitted. Call them at least every couple days to check on the progress of the evaluation. The most common mistake I see homeowners make is not taking ownership of the process. They will submit everything then sit back and wait to hear from the lender. The system is tedious, ambiguous and seemingly endless but asserting yourself can tilt the odds in your favor. Another underutilized tactic is documentation. Every phone call, email and paper submitted should be recorded with a date and time. Make copies of everything. Always document everything! This will make you stand out from others in the same situation and reinforce to the lender that you are logical, persistent and deserving of their consideration. Also, be cordial. Be polite. There are times when things can get adversarial and if you remain calm and civil it will only help your case.
Unfortunately, most borrowers seeking a loan modification are just delaying foreclosure, not preventing it. Imagine if half your monthly income went towards your mortgage. How would you deal with an emergency? What if the AC goes out? Or the roof leaks? If your loan is extended another 30 years will you ever really own the house? In these cases the best outcome is to sell the house. Is it a hard decision? Is it emotional? Yes for both. But once sold the sense of relief will set in because you’re free from the burden of excessive debt. At Logic Home Solutions we are local home buyers dedicated to helping people find the best result, regardless of the situation, when it comes to selling their homes. We can help even if you have no or negative equity. We make the process quick and easy. If you have any questions regarding loan modifications, foreclosure or selling your house we’d love to hear from you.