Loan Modifications

Henish Pulickal

March 27, 2019

A mod can help you out of a tough mortgage situation.  Here are a few pointers:

A loan modification (loan mod) can be hugely beneficial for you to stay in your home and prevent foreclosure.  Basically, a loan mod is when the bank rewrites your mortgage with more favorable terms for you in order for you to make your payments to the bank again.  Let’s go into more detail:

Who Should Apply for a Loan Modification?

  1. Did you have a temporary income reduction (job loss) or unforeseen expenses that prevented you from making your mortgage payments for one or more months?
  2. Do you have an adjustable interest rate that is changing and becoming too expensive?
  3. Is the value of your home lower than the amount you owe the mortgage company?  

If you answered “yes” to any of those questions, you may be a good candidate for a loan modification.  

How Do I Start the Process?

Contact your mortgage servicer/bank.  Tell them your situation and explain you would like to get a loan modification so you can get your mortgage back on track.  They will need you to submit a lot of paperwork including: financial worksheet of all your income and expenses, pay stubs, bank statements and tax returns.  This can be a frustrating process, so be patient. They need every page of every document, even the pages on your bank statements that don’t have any info regarding your account. You have to be very detail oriented with this process.  Every missing document will delay the review of a modification application by two or more weeks!

What Happens Next?

Ideally, you’ll get the loan mod and your payment will be reduced to an amount you can afford. Some of the common methods the bank uses to modify your loan is to add the total of your missed payments to your mortgage balance, reduce the rate and extend the length of the mortgage.  Here’s an example to illustrate:

You owe $200,000 on a home worth $300,000 and you have missed $10,000 in payments.  Your currently pay 5% interest on a 30 year mortgage and your payment is $1,074. After the modification, the new mortgage would be $210,000, at 2% interest on a 40 year mortgage.  Your payment would be $636. You would be saving over $400/month!

If your home is underwater (worth less than the mortgage balance), it is less likely that the mortgage company that they will reduce the amount you owe.  

What’s the Catch?

Mortgage companies want you to pay the mortgage.  But they are also in the business of making money.  The lower interest rate they offer you is often temporary. The 2% rate may only be for the first year.  The rate may rise by 1% per year until it reaches a specified cap (maximum) rate, typically around 5%.

Additionally, I’ve read that 80% of modifications fail within 6 months.  I don’t have a good explanation for this except that the hardship that caused the initial missed payments has happened again. You really have to think about whether a modification will solve your problem or if it will be a delay tactic.   

Don’t Pay for Modification Services

I cannot stress this enough: It is illegal for anyone to charge an upfront fee for modification or foreclosure prevention.  Even if they are lawyers.  Especially if they are lawyers!  This is the case in California and many other states.  Look up mortgage modification scams online and you’ll find a huge amount of articles where federal prosecutors have fined or jailed many people who have charged thousands for “modification” or “foreclosure prevention” services.  If you have been charged for this type of service, don’t hesitate to contact the State Bar of California to report the violation. You would call the police if someone stole $3,500 from you, right?  Anyone who charges you for this type of service up front is breaking the law and is effectively stealing from you. Here’s a consumer alert on this issue from the California Department of Real Estate when the rule first went into effect in 2009.  

If you have paid an attorney for modification services, you do have recourse.  Contact both agencies below to file a complaint and get your money back.

Office of the Chief Trial Counsel / Intake

The State Bar of California

845 South Figueroa Street

Los Angeles, California 90017-2515

Main Number: 213-765-1000   Complaint Hotline: 800-843-9053

Website: http://www.calbar.ca.gov/

Client Security Fund

State Bar of California

845 S. Figueroa Street

Los Angeles, CA 90017-2515

Telephone: 213-765-1140

Website: http://www.calbar.ca.gov/Attorneys/LawyerRegulation/ClientSecurityFund.aspx

Other Resources

HAMP

The number 1 resource: Call me!  I’m happy to provide a free consultation and help you stay in your house.  

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