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Mortgage Loan Modification: A How To Guide

The New York Times reports that a new California law is making it harder for struggling homeowners to hire an attorney to help them work through the mortgage loan modification process. The measure, passed overwhelmingly by the State Legislature and backed by the state bar association, prevents lawyers from receiving any payment for loan modification work before such work is completed. Devised to eliminate swindles and scams, the law has an unintended consequence: honest lawyers can no longer afford to assist struggling homeowners. According to the Times, “The length of time California households spend in foreclosure, which was rising as owners pursued modifications, fell in the third quarter to 8.7 months, from 9.1 months in the second quarter. That could indicate that the absence of defense lawyers is beginning to accelerate the process.”

State Senator Ron Calderon, who sponsored the bill, says it is working well; in his view, homeowners seeking mortgage loan modifications “do not need a lawyer.” While this may technically be true, it is also true that the banks are working with lawyers on their end of the foreclosure process, which makes for a somewhat uneven match. And though banks claim to be are interested in preserving home ownership and resolving loan delinquencies, the maze of red tape and paperwork presents a daunting challenge to the layperson.

If you find yourself underwater on your mortgage, the following steps may help:

Do not ignore mail or phone calls from your lender: If your lender does not hear from you they will be required to initiate foreclosure proceedings.

Contact your lender as soon as possible: If you are having trouble making your payments, contact your lender to discuss your options as early as you can. The longer you wait to call, the fewer options you will have.

Gather relevant documents, including:

  • information about the monthly gross (pre-tax) income of your household, including recent pay stubs.
  • your most recent income tax return.
  • information about your savings and other assets.
  • your monthly mortgage statement.
  • information about any second mortgage or home equity line of credit on your home.
  • account balances and minimum monthly payments due on your credit cards.
  • account balances and monthly payments on your other debts, like student loans, car loans or other personal loans.
  • a completed Hardship Affidavit describing the circumstances responsible for the decrease in your income or the increase in your expenses.

If you can show that you are making a good-faith effort to pay your mortgage your lender may be more likely to negotiate with you.

Get Help: You can petition for a loan modification without the help of an attorney; however, there are some things that only an attorney can do, like review every loan document for legal violations, or contest mortgage line items that may be unreasonable. Of course, in California, hiring an attorney may be problematic (see above.)

Seek foreclosure-avoidance counseling. You can find a listing of government-approved counseling agencies here. These services are provided free of charge. Beware any solicitors charging large up-front fees or guaranteeing you a loan modification or other solution to stop foreclosure.

As you weigh your options, consider the following questions:

  • What happened to make you miss your mortgage payment(s)?
  • Do you have any documents to back up your explanation for falling behind?
  • How have you tried to resolve the problem?
  • Is your problem temporary, long-term, or permanent?
  • What changes in your situation do you see in the short term, and in the long term?
  • What other financial issues may be stopping you from getting back on track with your mortgage?
  • What would you like to see happen?
  • Do you want to keep the home?
  • What type of payment arrangement would be feasible for you?

Possible Solutions:

Loan Workout Options: These options are available to individuals whose short-term situation is such that they have trouble keeping their mortgages current.

  • Reinstatement: Your lender may be willing to discuss accepting the total amount owed to them in a lump sum by a specific date. They will often combine this option with a forbearance.
  • Forbearance: Your lender may allow you to reduce or suspend payments for a short period of time. Forbearance may be an option if your income is reduced temporarily, but you know you will have enough money to bring the account current at a specific time in the future, such as with disability leave.
  • Repayment Plan: You may be able to get an agreement to resume making your regular monthly payments in addition to a portion of the past due payments each month until you are caught up.

Claim Advance: If your mortgage is insured, you may qualify for an interest-free loan from your mortgage guarantor to bring your account current. The repayment of this loan may be delayed for several years.

Mortgage Modification: This option is an appropriate solution for individuals with long-term or permanent payment difficulties. If you can make the payments on your loan, but you do not have enough money to bring your account current or you cannot afford the total amount of your current payment, your lender may be able to change one or more terms of your original loan to make the payments more affordable. Your loan could be permanently changed in one or more of the following ways:

  • Adding the missed payments to the existing loan balance.
  • Changing the interest rate, including making an adjustable rate into a fixed rate.
  • Extending the number of years you have to repay.

Home Affordable Modification Program (HAMP): The Obama Administration set up this program in the midst of the subprime mortgage crisis to help eligible home owners with loan modifications on their home mortgage debt. You may qualify for a loan modification under this program if:

  • Your home is your primary residence.
  • You owe less than $729,750 on your first mortgage.
  • You got your mortgage before January 1, 2009.
  • Your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) is more than 31 percent of your current gross income.
  • You can’t afford your mortgage payment because of a financial hardship, like a job loss or medical bills.

Chapter 13 Bankruptcy: If you and your lender cannot agree on a solution, you may want to file for Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts. While bankruptcy sound like an appealing option, it’s best to exhaust all other options before filing; bankruptcies can stay on a person’s credit report for up to 10 years, and once you file you cannot file again for a set amount of time. Choosing the right bankruptcy filing is also essential to effectively managing and discharging your debt.

During the Foreclosure Prevention Process:

  • Keep notes of all your communications with the lender, including date and time of contact, the nature of the contact (face-to-face, by phone, email, fax or postal mail), the name of the representative, and the outcome.
  • Follow up any oral requests you make with a letter to the lender. Send your letter by certified mail, “return receipt requested,” so you can document what the lender received. Keep copies of your letter and any included documents.
  • Stay in your home during the process, since you may not qualify for certain types of assistance if you move out.

Be Patient: It may take 3-6 months of calls, faxes, emails, letters etc. to get help before you get relief.

Be Persistent: The squeaky wheel gets the grease. Even if your request for a loan modification is turned down, keep trying. State and Federal Governments, as well as Banks, are constantly reevaluating policies and implementing new programs to help homeowners.

One Comment

  1. Jason Stuart says:

    That is what has happen to me back to 2009 when the global financial crisis hit the UK, as I nearly lost my house but lucky my brother willing to assist me through the hard time. The tips you give me is the real and i am one of the guy whose survive from it. thank