Are you trying to modify your mortgage loan? Here is why it doesn’t work.
You hear a lot about loan modifications on television, radio and in the newspapers. You’ve heard mention of President Obama’s Home Affordable Modification Program (HAMP). At least once a day, I meet someone trying to modify their mortgage loan. Under HAMP, lenders receive money from the government if they successfully modify a loan. However, nothing in the plan requires a permanent modification. Lenders began offering “trial adjustments” in order to receive the incentive money from the government, but very few of those trial adjustments ever become permanent modifications.
The Run Around
If you call your lender and request a modification, they start by sending you loads of paperwork to see if you are eligible. Once you complete the paperwork, you wait for the lender to process the paperwork. You won’t hear anything for weeks. Then, you might call to check on the status. You will be surprised to hear things like, “We never received your paperwork,” or “Your paperwork was incomplete.” None of this is true. The lender is trying to delay the process and hope you give up. However, you have no way of proving any of this.
If the lender decides to actually look at your paperwork, they might put you on a trial adjustment. Usually, your interest rate and monthly payment will go down for 3 to 6 months. The lender promises to make these adjustments permanent if you make all your payments on time during the trial period (Beware – see below). A few weeks before your trial period ends, you will again be surprised to hear you are not eligible for a permanent modification. The lender will cite reasons such as “Too much income,” “Not enough income,” or “Too much debt.”
The Statistics
Two reports in particular expose the truth. One report indicates only 1.26% of trial adjustments were made permanent. Another report indicates 650,000 homeowners have been offered trial adjustments, but fewer than 2,000 were made permanent; which equates to 0.003%. When the White House proposed HAMP, their goal was to permanently modify 3 to 4 million loans. That goal is not even approachable at this point.
The Reason
This has very little to do with the lenders or President Obama. The reality is most lenders do not actually own the loan. Once issued, mortgages are grouped into large bundles and sold to investors. The bank that issued the mortgage becomes a servicer; they simply collect the monthly payments and forward the proceeds to the investor. The bank does not own the loan and, therefore, does not have the authority to modify any terms of the loan. The owner of the loan expects to receive the full monthly payment each month.
Beware of Permanent Modifications
If you are one of the very few number of American “lucky” enough to be offered a permanent modification, read the terms carefully. You will probably find the deal is not as sweet as you hoped. Typically, the lender will reduce the interest rate and monthly payment for the remainder of the loan period. However, the principal owed does not change. The modified payments will not pay the full loan balance. You will still owe some principal when you make your final payment at the end of 30 years. This amount could be tens of thousands of dollars. This is called a balloon, and is due in a lump sum before the lender will release the lien on the house. If it is not paid, the lender can still foreclose.
In other cases, the lender may stretch out the length of the loan. You won’t have a balloon at the end of 30 years, but you will be making payments for an extra 5 or 10 years, including interest.
At the end of the day, the lender gets all the money you agreed to pay. A permanent modification gives you some relief in your monthly budget, but you still owe the money in the long run.
-Dustin R. Hurley
Attorney and Counselor at Law
Practice Limited to Bankruptcy Law