Loan Modifications: A Recipe For Failure
Asking for a loan mod? Don't!
I’ve spent the last several years building a humble real estate portfolio, and in the last two or three years, we’ve been lucky enough to weather the real estate crisis because of some of the techniques we’ve picked up. For that reason, I get a lot of calls from people asking for help as they try to avoid foreclosure.
In my part of California, loan modifications are a minefield with disastrous outcomes. Whether you are a homeowner, or an investor, I’ve never seen one that adds up as something beneficial for the person paying the mortgage. The bank always wins.
One man I spoke to let his house go into foreclosure because his bank “advised it.” Yes, his bank told him to stop making his payments so that he could qualify for a loan modification. Big mistake.
A representative at Chase, his bank, told him that they could only modify the payments if he stopped making mortgage payments for three months.
Apparently he didn’t know he was launching the legal process for foreclosure separate and apart from any loan modification. While he tried working out a new deal with Chase, Chase contracted with a service company to file the paperwork on the foreclosure. When he was rejected for a loan mod, he called me frantic that he was going to lose his home.
When I talked to him he was $30,000 behind and at risk for the bank taking the home he never intended to lose — all because he wanted to lower his payments. His only choice was to get an attorney, make up the back payments and pay the added fees and interest, and hope that he could reinstate the original loan before it was too late.
In the end, he lost his home.
This is not the first time these kind of shenanigans have been pulled, all because some bank representative suggested something that misled the homeowner. Frankly I think banks should have some legal liability for suggesting such a daft step.
I've Never Seen A Loan Mod Work
If you are thinking of a loan modification, remember that very few of them are ever accomplished, and they often pile fees and interest charges on the back end.
Here's an example: a friend asked me to analyze the offer she got from the bank to modify the loan. The bank said it would add all the charges, fees and interest onto the balance of the loan and they could continue making payments for the next 50 years (yep, this is not a typo).
It just didn’t add up, and it meant that my friend would be paying until she died or sold the house for a loss.
My advice: don’t do it. There are many ways of walking away or selling a house at risk for foreclosure without doing a short sale. Some people go through bankruptcy, but even that isn’t always the best option. We have other ways that work well, including one technique I used for my mom where we sold the home using the underlying mortgage, in what's called a "wraparound" mortgage.
A typical mortgage is a business deal between two parties. One agrees to lend at a certain rate, the other agrees to pay. If the deal falls apart, the bank has the right to take the house back. While this is how most mortgages are written, look carefully at your mortgage document to make sure this is the case.
Personally, I’d like to see some some third party arbitration process oversee modifications in lieu of foreclosure, giving the bank and the homeowner clear steps and responsibilities. All too often, banks seem to have unilateral control, and this doesn’t seem equitable. Neighborhoods suffer, and the economy continues to suffer as well.