In reviewing the articles that I have written in the past I discovered that while I often mentioned a certain tag line, I never really went into depth about why I believe it. So in this article I intended to explain in full light why “Loan Modifications Don’t Work!”
In general I believe that the misunderstanding of what a modification is, what it can do for you, who qualifies for it, and if it is really worth the trouble, is the real issue (as it opens the door to exploitation and danger, due to naiveté). That being said there are seven main issues that really make my blood boil, and need to be brought to light.
Without further ado, the issues:
1. Loan modifications fail to address the issue that the value of the property has fallen so far that it no longer makes sense to own it.
a. As an example: If you wanted a car worth $30k, and the sales man said “I’ll give you the car for $50k, but at 0% interest!”, would you take that deal?
b. Let me guess: you know someone who had their loan balance reduced by $100k? Well the truth is that while this does happen, the fantasy of a principal reduction is farfetched, and frankly dangerous to believe in. It is rarer than seeing a polar bear in the jungles of Brazil.
2. Government and Media bolster the idea that anyone can get a modification, when in reality if you lost your job you will not qualify, if your payment at 3-4% interest (fully amortized, with taxes and insurance added in) is not lower than 31% of your gross income you will not qualify, if you are over a year behind and your loan is FHA backed you will not qualify, and on and on and on. There is a litany of reason that these banks have for not giving a modification, yet no one ever talks about it.
a. Why is that an issue? Well, it’s a major issue because the months that these poor homeowners spend chasing the modification dream, when in reality they could be told in 5 minutes if they will qualify, is invaluable time which should be spent looking at other options.
3. The denial process is one that takes months (even though as I mentioned above, it could be determined in minutes).
a. During these months homeowners are led-on with the belief that if they just comply with what the bank is asking for they will be approved; however the whole doc collection process is really just the bank waiting for the homeowner to miss one request and then just deny them.
b. To make matters worse, the collections department continues to call and drive home the idea that the homeowners should stay current and keep making payments they cannot afford, when we all know that the banks triage their loss mitigation. The further in default the faster they work.
i. I have had retired homeowners come to me in tears after two years on a trial modification. Why were they crying? Because they drained their 401k’s, their IRA’s, their pensions, and themselves only to find out what they could’ve been told in five minutes that they don’t qualify!
4. Trial modifications.
a. That should be self-explanatory, but for the uninitiated allow me to explain:
i. Getting a trial mod is easy. Getting a permanent mod is hard. Just because you get one doesn’t mean you will get the other, yet that is what they lead you to believe.
1. Why would they do this? Hmm, well why wouldn’t they give you a little hope if it means that they can get you to start making payments to them?
2. Oh, and don’t forget: THIS IS ANOTHER WAY OUT. The first second that you are late on a trial mod payment they close you out and foreclose.
ii. The conversion rate of trial modifications to permanent modifications is disgusting. It rarely works out for the homeowner, and when it does it takes 7-10 months, not 3!
5. The savings with a modification are variable.
a. While your neighbor may have received a principal reduction of $100k and a reduction of their payment by $500 dollars a month, your potential for a modification is completely independent.
i. For example if you have a Negative Amortization Mortgage (aka a Pay Option Arm), on which you have been only making your minimum payment (not even interest only), guess what has happened to your principal balance? It has now increased due to all the interest you have been unable to pay.
1. So when you do finally get your modification, and your interest rate goes from 6% to 4%, guess what balance they are going to amortize your loan over: Ding ding ding, that’s right, they are going to use the maxed out (likely at 150% of your previous balance) balance to calculate your monthly payment. The end result is that your payment actually increased, due to the full amortization schedule of the new loan on the new balance.
6. Modifications have statistically been proven to really just be temporary solution.
a. While I don’t have the latest numbers I can tell you that having done over 14,000 loan modification in my previous life, time and time again our clients came back unable to afford their modified mortgages.
i. Oh you got a modification? Your payment went from $5,000.00 a month to $3500.00 a month? Well, you still only make $4000.00 a month at best! Are you going to be able to survive for any real length of time on a budget of $500.00 a month with a family and bills?
ii. The help is simply not enough, and holding onto a dream is a dangerous proposition.
7. Modification Attorneys
a. Don’t get me wrong I am sure there are some attorneys out there who are genuinely trying to help homeowners; I just haven’t met them yet.
b. As if attorneys needed any more bad PR, these vultures take advantage of the fact that homeowners are in need; and are holding on to the belief that they can still keep their home.
i. They know full well (just as I do) within five minutes of looking at someone’s financials if they will qualify, yet they make you sign a retainer prior taking a look.
ii. I know I know, what about SB 94 which states that they cannot collect payment for a modification until it is received? Are you ready for a lightning bolt of information: THE ATTORNEYS ARE NOT GOING TO CHARGE YOU FOR A MODIFICATION AT ALL! They are going to string you along for month, charge you for incidentals like forensic audits (which by the way you only have 4 years to pursue fraud from the date of origination, which they won’t tell you), and then eventually convert you to either a Bankruptcy or a Litigation client.
1. And believe me once they have you as a BK or Lit client, they’ve got you by the check book.
a. Want to cancel? OK, deal with the foreclosure sale date on your own that has popped up over the past 6 months they have been stringing you along for…
I could go on for pages, discussing the loopholes that people exploit to get a modification that they later learn they can’t afford; or talking about how the NPV (Net Present Value) Test is the ultimate excuse, in that it allows lenders to have a convoluted and non-public algorithm that they use to determine if it is in the investors best interest to foreclose or modify. However, I will spare your eyes and your spirit further destruction.
It’s not that I don’t have hope, and that I don’t have faith. I want to believe in the greater good of the human spirit, but at a certain point I cannot ignore what I have seen and found to be true: Modifications don’t work for the vast majority of people!
A co-worker once told me something that I think is quite profound, during a conversation regarding homeowners’ belief in modifications and principal reductions, he said “I believe in miracles, but I don’t expect them!” Homeowners in distress would be wise to live by this motto.