Owners with mortgages large and small looking for relief through loan modification

Hello All,

Happy Wednesday!

I want to talk about loan modifications. If you are currently in the process of seeking a modification, I want you to know what I know and what I think you should “add” to your negotiation strategy.

In the past 10 days I’ve spoken to 6 Kirkland homeowners and 1 loan officer all waiting for loan modifications or forbearances  to come through on their primary residences. Key word here is waiting. None of the 7 parties had received anything substantial or concrete from the bank in months, if ever. They are deflated, irritated that they are wasting their time, and quickly  coming to the realization that there needs to be a better way solution. Some process, some infrastructure, some method.  

So why does it seem like there aren’t many successful cases of modification out there? Is this really the case? If they are so difficult, is it better to cut your losses and go for the more-or-less realistic short sale instead?  

A common case I have seen out there with loan mods is that the banks will lead hopeful owners on, promising to push through the permanent modification if all goes well with the trial modification. Many owners, who would prefer to stay in their home, in good faith, will continue to make payments. The bank may then break the agreement or continue to move forward with the foreclosure process unbeknownst or unannounced to the homeowner.  Homeowners report calling the bank and it’s not up for discussion. Perhaps it happens because the bank has 15 people working on a file and no one can keep the file straight or it’s purposefully misleading the owner to take as much money as they can before the inevitable happens, or perhaps the investor on the loan overpowered the current servicer and the investor cancelled the process. Who knows? The bottom line is that based on my experience the chances of getting a PERMANENT loan modification approved is extremely low.  

Why is this? I’ve heard some interesting theories and comments from those looking to modify but I believe most of the answers can be found in the following.  

If you are looking to modify your loan, please make sure you know this first:

You are not modifying the actual amount you owe to a new, lower balance.If a homeowner owes $500,000 on a mortgage and the underlying property has a current market value of $360,000 the relief the homeowner really needs is a “cram down” of the mortgage by $140,000.  This is not what a loan modification does.  This is not really within the power of banks and loan servicers who can generally make a small reduction in monthly payments with the “forgiven” amount merely added on to the outstanding balance plus fees and interest.  You therefore do not modify the amount that you owe, you merely modify how you pay that amount back.

Why doesn’t modification work?  While these are ‘new home loans” to the homeowner, they are investments to someone else that must account for the “lost” $140,000.  Earlier this year In a win for Wall Street, Senate lawmakers voted down controversial legislation  that would have allowed bankruptcy judges to rewrite the terms of mortgages for stressed borrowers.  The banking industry opposed this to the bitter end citing the “chilling effect” that this law would have had regarding the enforceability of contracts. My two cents portion: It’s hard not to be cynical about the contradiction this position has with the bailout of these same institutions by the very people whom they are actively opposing.

A local attorney said it best when he said, “Lenders, Media and Government have mislead the general public regarding the efficacy and amounts of loan modification“.  Lenders have staffed up with entry level and commissioned base employees that do not have the authority or experience to modify anything. Their pay is sometimes based upon worthless applications for modification not in successful completion. The entire effort is to boost consumer confidence and generate payments of “good money after bad” for the 70% of the “successful” borrowers fall right back into default. Most owners are looking to modify their mortgages because they want to stay in their homes. They don’t want to sell or move and generally they believe their financial situation is temporary. After speaking with several bank reps myself, they tell me that they don’t believe most homeowner can afford the home any longer and it’s money, time, and resources spent for the bank if they process the permanent modification, when the likelihood is that the owner will default again.  

In the past 2 years I have only seen one permanent modification granted out of approximately 40-50 attempted cases. I personally have not seen any modification service produce a permanent modification for a homeowner. That’s being realistic in my experience. Now, of course there are exceptions to the rule and there obviously are those out there that have succeeded and for those, I give them a huge “WAHOO!” I also want to ask them if they had to hijack the president of the bank Nat’l Lampoon’s Christmas Vacation / Uncle Eddie-style to get that done. You can take your Jelly of the Month Club and…. But I digress……   

 (And isn’t it odd that Uncle Eddie is now in the news for squatting and then we had the squatters in Kirkland? ….That’s taking this blog entry very “full circle-ish”  I should write about my experience with the squatters here one day…)

 But I digress again……

 But my verdict, for those faced with  is:

 Attempt, on your own, (knowing that it will be a full time second job that you will likely not see a return on) to negotiate a loan modification with you mortgage servicer. Do this knowing that there is a 97% chance it will not go through or remain permanent. That is based on national statistics on 2009 from NAR. Expect to get your heart broken and to be frustrated with this process. And then….as a back-up plan or as I believe, your  realistic plan ….go out and seriously educate yourself about your other options.

 The options…  Generally, putting your home on the market, commonly as a short sale, is the “easiest and fastest” way to go. Or let’s say from my Realtor point of view it’s your best bet and most realistic option. Connect yourself with an agent who is truly versed in short sales and a do not try to sell without hiring a short sale negotiator. And don’t just take their word for it. Ask for proof that they have sold short sales and talk to at least one satisfied client before hiring that agent.  Professional negotiators generally don’t cost the seller a dime. Please contact me if you would like a referral for a reputable short sale negotiator in the Kirkland or Greater Eastside area.

 Other options include renting out your home to a renter who can pay more than you or taking in a roommate while you financial situation changes. And there are many, many other options depending on your specific situation.