Archive for February 6th, 2013

Want a Loan Modification? Save Your Money!

Whenever a homeowner facing foreclosure tells me that he/she wants to obtain a loan modification, what’s the first thing I discuss?  No, it’s not that loan modifications are hard to come by, especially those with principal reductions (even though that’s true).  And no, it’s not that banks have all sorts of perverse financial incentives to foreclose rather than work out a mortgage modification (even though, sadly, that’s true as well).

The first thing I ask my clients is how much money they’ve been able to save while the foreclosure lawsuit has been pending.

Look … I’m not judgmental.  I get that the economy sucks and that a lot of good people are unemployed or underemployed.  I understand that, for many people, saving money just isn’t possible.  And I understand that nobody wants to lose their home.  That said, if you haven’t made a mortgage payment in two years, have been unemployed for 18 months, and have no savings, how do you think you’re ever going to get a loan modification?  I think I’m pretty adept at defending foreclosure lawsuits, but if this is your financial situation, there’s nothing I can do to make a bank give you a loan modification.  Can I fight the foreclosure lawsuit?  Absolutely?  But can I somehow force a bank to give you a modification (when you basically have no money)?  Sorry, no.

Here’s the cold, hard reality, as I see it (not intended to be harsh but to help homeowners realize the situation they face) … why would a bank modify your loan if you can’t afford to pay, even at a reduced rate?  Even if we can get past the other hurdles to obtaining a modification (the perverse financial incentives to foreclose, the infrequency with which modifications are offered, and the perception that offering principal reductions would induce everyone to default), if you can’t afford to pay, then what’s the point?  Ultimately, the best way you can prove your ability to pay is to save money.  Saying you can pay is one thing – pulling out cash is another.

This is why my first discussion with clients who say they want a loan modification is to inquire about the amount of money they’ve saved.  In my view, if you haven’t been able to save any money while the foreclosure case has been pending, then you probably can’t afford to pay, even if a loan modification were offered.  After all, if you were able to pay on a monthly basis, then you’d have some money saved.

Sometimes, this advice creates some understandable anger.  “You don’t know what you’re talking about, Stopa.  I just chose to spend my money in other ways.  I paid other debts.  I have a job now.  I can afford a modification.”

OK.  But here’s the problem.  On the rare instances where I’ve seen modifications offered, they often look like this.

At first glance, this loan modification offer looks appealing, and in some ways, it is.  The monthly payments are reduced, and it even has a principal reduction!  For some homeowners, this sort of offer is a godsend, creating the ability to keep ones home and avoid foreclosure.

However, look closer.

Do you see how the agreement requires that monthly payments begin immediately?  There’s no “wait 60 days until I get a job” – the monthly payments start now.

Do you see how the agreement is predicated on proof of insurance?  For the homeowner to get this modification, he/she will have to immediately obtain homeowners’ insurance – and pay for it.  For anyone whose insurance lapsed, getting insurance right away will not be easy, or cheap.

Do you see how “any payments for taxes and insurance will be [the homeowner’s] responsibility in addition to the payments of principal and interest”?  Hence, the homeowner not only has to pay the monthly payment, he/she has to pay property taxes, too.  Does that include delinquent taxes?  The agreement is not entirely clear, but I’d say so.  Of course, these taxes could be many thousands of dollars.

Do you see how “fees and charges that were not included in [the new] principal balance will be [the homeowner’s] responsibility”?  What does this mean, exactly?  Frankly, your guess is as good as mine – this agreement, as written, is clear as mud.  Does it mean that the fees and costs the bank incurred in the foreclosure case have to be paid by the homeowner?  If so, when?  And how much are these fees and costs?  We really don’t know, but that’s the problem – arguably, the bank could simply hand you a bill and say “pay this.”  Sure, you could fight that.  But if you signed, and those are the terms on which the bank is giving the modification, you may have no choice but to pay.

Do you see how “any expenses incurred in connection with the servicing of [the] loan, but not yet charged to [the] account as of the date of this Agreement, may be charged to [the] account after the date of this Agreement.”  What does this mean, exactly?  How much are these charges?  When are they due to be paid?  Again, you may get stuck paying this bill in order to get your modification.

There are other problems with this modification as well, including (1) there is no representation from the lender that it is the owner/holder of the Note and Mortgage; (2) the foreclosure case proceeds unless/until the homeowner has done everything the agreement requires, including obtain Ocwen’s signature; and (3) nothing in the agreement requires the foreclosure case to be dismissed even if all of the terms are complied with.

The point here, though, is that even if the homeowner wanted to do this modification, it requires immediate, out-of-pocket payments – monthly payments, starting immediately, but also payments for insurance, property taxes (including back due taxes), and, arguably, some unspecified amounts for fees, costs, and service charges.

This is a good illustration why I encourage homeowners who want a loan modification to save their money.  As you can see, if you don’t have cash on hand to pay these expenses, then even if a loan modification does come your way, you won’t be able to take advantage.  So when you hear me asking about whether you’ve saved your money, please realize – I’m not being judgmental.  I’m trying to assess whether you can comply with the terms of a loan modification even if you’re one of the lucky homeowners to whom such a modification is offered.

Mark Stopa

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