Loan Modification Secrets

Mortgage Payment Assistance for the Unemployed

With the highest foreclosure rate in the nation, Nevada residents are getting help with a new program called the "Hardest Hit Fund".  Nevada was rewarded over $150 million in funds available to be dispersed to qualified recipients through federal grants designed to help struggling home owners.  

The Mortgage Assistance Program (MAP), is intended to help the underemployed and the unemployed homeowners who have experienced involuntary job loss and/ or severe reductions in income.  The program will pay 1/3 of the principal and interest portion of a homeowner's monthly mortgage payment, up to a maximum benefit of $500 per month.  The fastest way to see if you qualify for the program is to call this number 855-428-HELP and they will ask you a series of questions.  This is for Nevada residents only. 

Below is a list of general eligibility requirements for the MAP program:

• Legal U.S> resident

• Owner Occupied - Primary Residence

• Loan originated 1/1/2009 or earlier

• Financial hardship

• Income not more than 120% of area median income

• Facing default

• Must be currently underemployed or unemployed

• Currently own only one property

• Maximum loan limits

·       Clark County:  $427,184

·       Reno/ Sparks:  $431,189

·       Rural Nevada Areas:  $347,087

Some of the other programs available through the Hardest Hit Fund:

• Short Sale Program

• Counseling

For more information on the Hardest Hit Fund, visit http://www.nevadahardesthitfunds.org/

Pitfalls of Loan Modifications

There are articles out there that talk about the pitfalls of loan modifications and they are saying things that are just not true.  I'm writing this so you know the real disadvantages of loan modifications.  Depending on who is writing the article, they will have a different agenda and that agenda favors the writer of the article in many cases.  That is something to keep in mind and with that it will be easier to see through some of the deceptive and manipulative articles out there regarding loan modifications. 

First of all, I will attempt to cover some of the so called pitfalls that are really not negative aspects of loan modifications.  Loan modifications have high fees (Truth:  Loan modifications have little if any fees), all back payments must be paid before you can get a loan modification (Truth:  any back payments can be added to the back of the new loan), late fees will have to be paid before getting a loan modification (Truth:   late fees are typically forgiven), your modified mortgage payment could go up (Truth:  your mortgage payment won't go up unless your dumb enough to sign those documents.  The whole reason the program is there is to lower your mortgage payment), you need an attorney to file your loan modification (Truth:   you can file your own loan modification), there is a lot of paperwork to fill out (Truth:  the application has three pages and the last page requires only your signature and date), and last but not least it will have a negative impact on your credit (It's Completely not true). 

Now that I have some of the myths out of the way, I can concentrate on the purpose of this article.  Here are some examples of actual pitfalls that can occur while trying to get a loan modification:

Final Modification Payment is Higher Than Trial Modification Payment

When you request a home affordable modification, you have to include and show proof of your gross monthly household income.  The first part of getting approved for a loan modification is receiving trial period payments for three months.  Loan servicers will tell you it is for three months and this period might last for three months or two years it all depends.  In that period of up to two years your financial situation could have changed.  For example, you could have lost your job, gotten a raise, got a new full time job, got an additional part-time job,  your husband got laid off, you now get more over time hours, your now self-employed, or any number of situations that change your monthly income could have occurred.  When your lender decides to finalize your loan modification, your lender will have you fill out another modification application and it will ask for your current income which could be different from your income when your first started your quest for a loan modification.  Your lender will take a look at your most recent gross monthly income and require that you send them proof of your income.   Your final modification will be based on a percentage of this new gross monthly income which could give you a higher payment than what you were paying for your trial period payment.  In some cases, you could now have a higher payment than what your current mortgage payment is. 

Loan Modification Finalized /  Don't Skip a Payment

So your excited, after all the wait you get your final loan modification documents.  I wouldn't get too excited just yet, your lender still needs to sign those documents and have them recorded before your loan modification is finalized.  Typically, these documents will come in the middle of the month and the question will arise if you  should make your mortgage payment that is due in 15 days.  Your final loan modification documents say that your new payment won't be due for 45 days.  This will happen and you can count on it so pay attention so you do the right thing.  People call their lenders and ask the question if they can skip a payment and they will get different answers depending on who answers the phone at their lender's office.  Most people want to skip a payment and don't realize they are jeopardizing their loan modification.  This is not like the last time when you refinanced your house.  You should not skip your payment, don't do it.  After you sign and notarize your final loan modification documents, you mail them back to your lender who has one guy in charge of signing all modification documents.  Who knows when that guy will sign the documents and he might have a deadline that says he has to have your documents signed no later than 15 days before your new payment is due.  He could wait until the 15th of the month to sign your documents but before doing so he checks to make sure that you are current on your mortgage payments and he finds out that you didn't make your payment that was due on the first.  And just like that, he declines to sign your loan modification documents and by the time you figure this out it is too late.  I have heard this exact scenario several times and don't know if it is a last minute scam by the lender to deny a modification, but it happens a lot.  If you make that payment that is due on the first of the month and it wasn't necessary, the worst case scenario would be that it is applied to your new modified mortgage payment.

Chase Bank, Bank of America, Citibank, Wells Fargo and US Bank

The five largest U.S. banks, ranked by assets, are Chase Bank, Bank of America, Citibank, Wells Fargo and US Bank. It's been proven that our big five are too big to fail and difficult to get a loan modification from.  The U.S. government has been pushing and incentivizing loan servicers to complete more loan modifications through the HAMP program; however, our big five banks go by the beat of their own drum.  The most difficult lender to complete a loan modification through has got to be Bank of America.  I have heard many stories of them giving people the run-around.  I currently have a friend who signed the final modification documents for Bank of America and he was told he could skip a mortgage payment so he did.  He later found out that he should not have skipped the mortgage payment and his loan mod got denied, just like in the scenario I mentioned above.  Now, Bank of America is in the process of foreclosing on his house.  These banks have a lot of customers and might not have enough resources in place for the volume of modifications that they are attempting.  I would like to think that is the only excuse they have but it might be that these modifications are not profitable so they pretend to go along with the government's program.

Debt Forgiveness Can be Taxable

If the lender agrees to reduce the principal of the loan, the borrower may be liable to pay income tax on it. This is more likely to happen in the case of investment properties, versus primary residences. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.  This provision applies to debt forgiven in calendar years 2007 through 2012.

A simple example would be if a borrower owed $250,000 on their mortgage for an investment property and the lender forgave $40,000 of it. The borrower might receive a 1099-C tax form showing the $40,000 reduction as income, since it represents money the borrower was given and will not have to repay.

Unemployment Income Can't be Used for Income on a HAMP Modification

Unemployment income cannot be used for qualifying for the Home Affordable Modification Program.  If there is only one wage in a family's income and it happens to be unemployment insurance, they will not qualify under HAMP.  However, there is the Home Affordable Unemployment Program which is a  forbearance program for unemployed individuals who receive unemployment benefits.  This is a temporary forbearance program which provides a reduction or suspension of mortgage payments for at least three months while you seek re-employment.

Escrow for Taxes and Insurance Required for HAMP

If you are approved for a HAMP loan modification, you will be required to escrow for your taxes and insurance.  This will not affect a lot of people but will frustrate others who are accustomed to paying their own taxes and insurance. 

New Rules for Loan Modification Companies

As of January 31, 2011, the Federal Trade Commission enacted a regulation that prohibits a loan modification company from charging any upfront fees.  They cannot charge for their services until they secure a loan modification for their customer.  This regulation is designed to protect distressed homeowners from the promoters of bogus foreclosure rescue and mortgage modification services.  Attorneys can be exempt from the new advance fee ban if they represent consumers in a bankruptcy or other legal proceeding.  Otherwise, attorneys will not be able to collect an upfront fee. 

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

Historic levels of consumer debt, increased unemployment, and an extraordinary downturn in the housing and mortgage markets have contributed to high rates of mortgage loan delinquency and foreclosure.  This mortgage crisis has launched an industry of companies charging a fee for mortgage loan modifications or other relief for consumers facing foreclosure.  Some of these companies are legit and others were charging a fee upfront and then disappearing.  This new regulation should make it cut and dry for the consumer.  If a loan modification company is trying to collect money upfront, they are not a legitimate modification company and are breaking the law. 

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” Treasury Secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

Under the new rule, it is illegal for modification companies to misrepresent, either expressly or by implication, any material aspect of their services.  This includes any information that will sway a consumers decision to use a service over another.  Here are some material claim examples:

• mortgage relief and the likelihood of being able to get, negotiate, or arrange
• a time period for getting the advertised mortgage relief
• the affiliation with the government, public programs, lender, and servicers
• the terms, conditions,  and payments of homeowner's mortgages
• refunds and cancellation policies
• whether homeowners will be getting legal services
• For-profit MARS providers alternatives costs / benefits
• Savings for homeowners that use your service
• Total cost of service
• a time frame for how much time a homeowner has to accept an offer from their lender including terms, conditions, or limitations of that offer.

In addition, the new rule would require loan modification companies to tell consumers that they are for-profit businesses, the total amount of fees paid by the customer, that their services are not approved by the government nor the consumer’s lender, and that there is no guarantee that the lender will be able to make changes to their loan.

After reviewing the new rules, I do see one area that can cause some confusion and frustration for consumers.  Loan modification companies will not be able to charge money upfront but they will be able to charge their full amount due once the consumer agrees to the terms of a trial modification from their lender.  Typically, the trial modification payments will be made for three months to over a year before the borrower is given the final modification.  During the trial modification period, the borrowers situation can change and they will be required to send new paystubs, bank statements, and other financial documents to their lender throughout the process.  If the borrowers situation changes during the trial modification, they are at risk of not being able to finalize their modification after paying hundreds of dollars to a modification company.  The new rules for modification companies don't address the issue of how much they can charge, so customers could potentially pay thousands of dollars for a modification that they never got.

Pay an Attorney or Modify Myself?

Unlike what most Attorneys will tell you, you can do a loan modification yourself.  A borrower's lender will encourage them to proceed with a loan modification without the use of an attorney so the borrower can save money and have more money to make mortgage payments.  A borrower can do their own research and be just as effective if not more effective than the attorneys.  The reason why a borrower can be more effective is because they have a lot more riding on getting the smallest mortgage payment because it will affect them for the next thirty years.  Lenders also assume that most borrowers don't know the ins and outs of the loan modification program and borrowers can use that to their advantage.  Furthermore, lenders know that attorneys have studied loan modification requirements and know ways to work the system and some may or may not share that advice with their clients.  In addition, an attorney wants to get paid quickly and will probably try to finagle the system in a way that it works out in their benefit. 

Here is a situation where the borrower gets the short end of the stick from an attorney.   The majority of attorneys will charge a smaller fee upfront ($500) and a larger fee once the modification is complete ($2,500).  So the borrower will pay a large fee once the modification is complete and even if the borrower gets nothing they will be on the hook for at least $500.  The attorney might be satisfied with only getting $500 per client because he won't have to do as much work and they can concentrate more on advertising and less on results.  A modification can take up to a year to complete because the lender wants to make sure that the borrower is a able to make the newly modified payments on time for a year before they are comfortable finalizing the modification.  One year is a long time for an attorney to wait on the $2,500 and he would have hundreds of other clients in limbo on their outcomes as well.  These same clients would  call weekly wanting updates on their modification using up the attorneys resources and making it hard for the office to handle new clients because the old ones keep calling wanting updates.  As a loan modification specialist, I know how to submit a loan modification application to a lender to get it approved and I could make changes to that same application to get it declined.  Many attorneys are having their clients pay $500 upfront and sitting on the paperwork to make it look like something is being done and then a few months later telling their clients that they were declined by the lender.  And guess who is on the hook for $500?  And there is nothing that can be done because the attorney had their client sign a document saying that they were responsible for paying $500 for any outcome of the modification.  Unfortunately, $500 is not a whole lot of money to where a person tries to sue the attorney and most people would look at that as another life lesson and move on.  After all, what are you going to do, sue an attorney.  

An attorney wants to get paid quickly and will probably not push for the lowest possible payment for a clients modification because that might get turned down and then they would have to resubmit all paperwork again.  The attorneys know the sweet spots where they were able to get previous customer payments modified to and will most likely stay in that range for a fear of denial which will prolong their paycheck. And of course the attorney will have many scenarios of how they were able to save one person a lot of money and of course they won't be able to guarantee you anything because everyone's situation is different.

 

What happens if the attorney is able to get a modification done for a client that saves them $50 a month on their mortgage payment?  As soon as that modification is approved, the attorney is then owed another $2,500 and has made a total of $3,000 from the client.  $50 dollars is not much of a savings per month but in the contract there is nothing stating that there has to be a certain dollar savings per month rather it says once the modification is approved another $2,500 is owed to the attorney.  A modification could be approved with only a $10 dollar savings per month.  There are thousands of different scenarios where the attorney makes their money and the client feels like they have been taken advantage of.  And most of these scenarios are not going to favor the client but rather the attorney who has covered his tail with contracts signed by the client.

    

  

In conclusion, attorneys might be able to modify your home but that does not mean that they will be able to substantially lower your payment and as a borrower you will be obligated to pay the attorney for the full amount of money that is owed to them based on a contract that was signed.  On the contrary, people might be sold on something that may happen and then find out that their modification was declined and the attorney kept the upfront money of $500 or more.  Although not all loan modification attorneys are crooks, if you insist on using one for your modification, talk to a homeowner who has gotten proven results and use the attorney they used.  I would make sure that you get to see those proven results because people tend to exaggerate and you never know who owes who a favor. 

Please keep in mind that this article is also referring to loan modification companies when it says attorneys.  The article was written directly in regards to attorneys because the majority of people feel safe when dealing with an attorney and some attorneys prey on that.

Foreclosure: The Last Option

When considering what to do with your home, foreclosure should be looked at as the last option.  It is the last option because this option is the easiest one to get and you don't have to do anything to get it.  However, the last option is one that no one wants so you need to fight back to avoid it.  This is a war and you don't want to go down without a fight.

You should fight like mad to avoid a foreclosure which will wreck your credit, embarrass you, make you homeless, put stress on your family, and make it difficult to rent a place to live because your credit will be ruined.  Foreclosure is for the person who wants to put their head in the sand and act like it's not happening.  I'm sure we all know someone who we thought was doing great and then out of nowhere, we hear that they lost their home to foreclosure.  And then we think, if we only knew, we could have helped them.  This has happened a couple times in my life and these were relatives of mine that knew I was in the mortgage business and I would have been a great mentor to them.  However, they didn't ask for help and I didn't know they needed it.   When people have too much pride, are embarrassed, can't ask for help, and act like everything will work itself out, this is when the inedible foreclosure will come into their life.

The first and best place to start when you are late on your mortgage payment is with a loan modification.  There is a new government program called Making Home Affordable (HAMP) and it does just that.  This program is designed to make your home more affordable by reducing your mortgage payments to 31% of your household gross income.  All lenders have this program available or one that is similar.  The main requirement to qualify for this program is you need to have a hardship and payments that are too high.  Obviously, if you are falling behind on your mortgage payment, that is your hardship and you should qualify.  This program will allow you to catch up on your mortgage payments, keep your home, and give you a fresh start. 

Sometimes you just want to be done with your home nightmare and want to give the house back to the bank.  In this case, you could do a died-in-lieu of foreclosure and get paid thousands of dollars from your lender.  A died-in-lieu of foreclosure is the voluntary transfer of ownership in your property to the servicer. Foreclosures are expensive and cost on average of $50,000 per foreclosure according to a survey held by the Federal Reserve.  Many people call a died-in-lieu of foreclosure cash for keys.  How this works is when you know that you are wanting to foreclose on your house, you can call your lender and simply ask them:  how much money will you give me to sign a died-in-lieu of foreclosure?  You have the upper-hand and if you don't like the amount they give you, decline it and call back at a later time and see what they can give you.  I would be looking for a number of no less than $5,000.  After all, how long can you live there without paying the mortgage?  Four months of living mortgage free with a $1,500 mortgage is $6,000.  A better strategy would be to live in the home mortgage free for as long as you can and when you feel your time is running out pursue the died-in-lieu of foreclosure for cash which will be a good down payment on a rental.

Home Affordable Foreclosure Alternatives (HAFA) Program

There is a new died-in-lieu of foreclosure or short sale program called Home Affordable Foreclosure Alternative (HAFA) Program.  When your mortgage payment is not affordable and you are interested in transitioning to more affordable housing, you may be eligible for a short sale or deed-in-lieu of foreclosure through the HAFA program.  With this program, they will first require you to sell your home as a short sale and the benefit of a HAFA short sale is that you are no longer responsible for the difference between what you owe on your mortgage and the amount that your home sells for.  You will also receive  $3,000 for relocation assistance upon successful closing of your short sale or died-in-lieu of foreclosure.   If the short sale falls through, your servicer will consider you for a died-in-lieu of foreclosure.

Below are a list of requirements for the HAFA program according to their website:

• You live in the home or have lived there in the last 12 months.
• You have a documented financial hardship.
• You have not purchased a new house within the last 12 months.
• Your first mortgage is less than $729,750.
• You obtained your mortgage on or before January 1, 2009.

You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Here is a link to more information on the HAFA program:

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1007.pdf

Bankruptcy

When it comes to bankruptcy for the consumer there are two basic kinds, Chapter 7 and Chapter 13.  I remember the difference between the two because 13 is an unlucky number and your unlucky when you have to file a Chapter 13 bankruptcy because you have to make payments on it for the next three to five years.  Whereas, a Chapter 7 Bankruptcy is when you are no longer obligated to pay your debts and they are wiped out.  Lucky number 7! 

Chapter 13 bankruptcy was designed to stop foreclosure and may provide protection, relief to save your home, and help you catch up on your past-due debts.  Chapter 13 bankruptcy is a reorganization of debts that allows a debtor to make payments to creditors over a period of three to five years. Chapter 13, often referred to as a "wage earner's bankruptcy", requires that the debtor have a steady source of income for the duration of the repayment plan.    Nevertheless, many people choose Chapter 13 when filing for bankruptcy because it may allow debtors to keep their home, car, and other types of secured debts. In addition, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.  Before filing for a Chapter 13 bankruptcy people need to think about why they are having problems paying their obligations and realize that with a Chapter 13 bankruptcy all they are doing is spreading their problems out over a period of three to five years.  If you got behind on your mortgage before, what makes you think it won't happen again if your financial situation has not changed?

Typically, people try to qualify for a Chapter 7 bankruptcy but may fail due to the means test. The Chapter 7 means test is a formula applied to determine whether or not the consumer should have enough money available to make some minimal payment to creditors.  A chapter 7 bankruptcy does not involve repayment of debts as in chapter 13 bankruptcy. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay creditors in accordance with the provisions of the Bankruptcy Code.  In addition, the Bankruptcy Code will allow the debtor to keep certain exempt property and a trustee will liquidate the debtor's remaining assets.  As a result of Chapter 7, a loss in property may occur.  A bankruptcy attorney usually has a good idea beforehand what will happen with your assets after filing for bankruptcy.

Bankruptcy will not be behind you until it is discharged.  Debtors in a chapter 7 bankruptcy usually receive a discharge within 60 to 90 days after the date first set for the meeting of creditors.  On the other hand, a chapter 13 bankruptcy won't be discharged until all scheduled payments are made to the trustee which could take up to five years.  Because a chapter 13 bankruptcy is not discharged until the last scheduled payment is received, this will negatively affect your credit for the three to five years until it is discharged.  Don't expect to purchase a home with a mortgage until your chapter 13 bankruptcy is discharged and you might be looking at an additional couple of years after that.  When filing a chapter 13 bankruptcy you could be looking at five to seven years before being able to mortgage a home.  With a chapter 7 bankruptcy you are able to put the bankruptcy behind you faster and generally will be able to mortgage a home quicker than a chapter 13.  After filing for either bankruptcy, don't expect to mortgage a home for at least four years and that is if you are able to reestablish your credit. 

Let's recap, a chapter 13 is used when you are wanting to catch up on your mortgage payments and want to pay your creditors back over the next three to five years.  A chapter 7 bankruptcy is helpful when you don't want to pay your creditors back.  With the new Making Home Affordable Program (HAMP), you can now have the best of both worlds but even better.  You can modify your mortgage with HAMP and this will restructure your mortgage, catch you up on back payments, and lower your mortgage payment to one that is affordable.  After getting a loan modification you could then file for a chapter 7 bankruptcy and then you're getting the best of both worlds with a new lower mortgage payment.