Loan Modification: Why The Bank Won’t Work With You

20Oct09

man question

Inevitably, my clients that are behind on their mortgage payments and possibly facing foreclosure ask me, “What about a loan modification?”  Here’s my answer:

Modifications are intended primarily for owner occupants.  Also, attempting a loan modification does not stop the foreclosure process. By the time the property owner finds out the bank won’t cooperate on a modification, it could be too late to do anything else and the bank could foreclose.  Unfortunately, due to circumstances beyond their control, many of them paid the highest possible price, with the highest possible financing, at the highest peak of the market.  So, even if a loan modification is successful, the homeowner is still upside down, owing significantly more than the property is worth.  One has to be willing to hang on to the property for 20 years or more.  That’s how long properties in Tampa Bay will have a negative value and, for investors, generate negative cash flow.

j0433180Sometimes I meet with homeowners that have already attempted a loan modification with the bank.  These folks share the same bewildered expression when they ask, “Why won’t my bank work with me?”  It seems that mortgage companies do everything they can to avoid modifications. Perhaps this, taken from an August 6th article in the St Pete Times, explains why:

 “Without government aid, servicers don’t have enough financial incentive to modify mortgages. Each year, they earn about one-quarter to one-half percent of the value of the loans they service, so the larger the mortgage, the more they can make. They earn less if the loan is modified, usually by lowering the interest rate or principal or adjusting the term.

The servicers also make money through late fees, or by foreclosing. The paperwork necessary to execute a House 4foreclosure can generate hundreds of dollars in fees for some servicers.”

More about loan modification from the Tribune:

“Housing advocates say homeowners still face “reluctant lenders,” said Irwin Trauss, an attorney who represents low-income homeowners for Philadelphia Legal Assistance. He recently testified at a hearing of the Congressional Oversight Panel, the watchdog that monitors the Treasury’s Troubled Asset Relief Program, better known as TARP, or the bank bailout bill.

Trauss said that Bank of America, at least through July, told homeowners that they couldn’t participate in the program when they should’ve been allowed to do so, and he alleges that Saxon Mortgage forced one of his clients into bankruptcy without providing a valid reason for turning down her modification request. Trauss’ comments were echoed by other housing advocates, who’ve found mortgage servicers slow to respond and confused about modification rules.

Servicers look for reasons to avoid making the modifications when they are most needed, rather than for opportunities to make them,’ Trauss said.”

 Banks are like everyone else – they work their pay plans, and mortgage modifications apparently don’t pay them enough.  A modification is unlikely, so be sure you don’t fall prey to a “stop foreclosure” company that wants money up front for “helping” you with the modification.   

However, a loan modification can be pursued simultaneously with a Short Sale.  If the loan modification is successful, the listing (even with an offer on the table) can be withdrawn, without penalty.  Listing a property, short sale or not, doesn’t mean the sale has to close.

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