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Navigating the Mortgage Modification Maze

Getting a home loan altered is no easy task

By Broderick Perkins

December 26, 2008

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Renters of Foreclosed Properties in Connecticut Have Rights • Pending Home Sales Rise in December • Homeowners Say Banks Not Following Rules for Loan Modifications • 2.8 Million Homes Threatened With Foreclosure in 2009 • Long-Term Mortgage Rates Hit Record Lows • Pending Home Sales Rise In October • New Home Sales Rise As Mortgage Rates Fall • Nearly One In Four Homeowners Under Water • Existing Home Sales Jump 10 Percent • Mortgage Delinquencies Still Climbing • Realtors See Signs Of Housing Turnaround • Zillow.com: Fewer 'Underwater' Homeowners In Third Quarter • Distressed Homeowners May Be Able To Rent Their Homes • Should You Walk Away From Your Underwater Mortgage? • Home Prices Rise Four Months In A Row • Consumer Credit Plunges In August • Study: Action By Feds Made Housing Crisis Worse • Mortgage Lender's Collapse Leaves Borrowers Adrift • Bank of America, Wells Fargo Hit With Class Action • Bank Sees Dim Future For Homeowners • Ohio Sues Mortgage Servicer Over Lack Of Modifications --- • More ...

Home loan modifications are designed to save homeownership, but they've also created another mortgage maze pitted with "buyer bewares."

Both government-sanctioned counseling agencies and local community service agencies concede they have been swamped by demand for loan modifications. The demand has opened the floodgates of loan modification services now offered by real estate agents, mortgage brokers, attorneys, government agencies, lenders, and other professionals.

The demand stems from a proliferation of federal, state and local foreclosure relief and bailout efforts from both government and the lending industry. Mortgage modifications have been around for years, but those recent efforts have raised the profile of the mortgage workouts as an alternative to foreclosures, short sales, auctions, and bankruptcy.

However, homeowners seeking mortgage modifications are at the mercy of lenders, because the workouts are voluntary and often without regulatory standards.

Caught in the lurch, homeowners are finding it tough to know when a modification will work and how to best obtain one.

What is a mortgage modification?

A home loan modification, granted only upon the existing lender's approval, permanently reworks some of the terms of an existing mortgage in order to make the loan more affordable to the homeowner.

The strategy is typically designed for homeowners struggling to pay their mortgage, not for those who can pay their mortgage or are eligible for a refinanced loan.

Modifications are generally lender fee-free and involve the lender or loan holder lowering the interest rate and or changing an adjustable-rate mortgage (ARM) to a fixed rate mortgage (FRM) with a 30-year term. Some form of mandated homeownership counseling generally comes with the deal.

Less common loan modifications include adding missed payments to the loan balance and extending the term of the loan. Least common is getting the lender to reduce the principal or wipe out any second mortgages.

A mortgage modification is not a refinanced mortgage — a brand new loan written to pay off the old home loan.

"A mortgage is one of the most complex transactions there is. A loan modification is also a gray area for a lot of people. So of course people need someone to walk them through the process to tell them this is what you need and this is what you don't need," said Ginna Green, spokeswoman for the California office of the Center for Responsible Lending in Oakland.

Is a loan modification for you?

Greg Pennington, a San Francisco-based mortgage banking consultant and counselor with Parker-Pennington Enterprises, says a loan modification isn't for everyone.

A loan modification may not be viable if:

• The modified loan comes with payments you still can't afford.

• Your current interest rate is already low and there's no room for the lender to lower it further.

• You can make the new payments, but the mortgage balance is greater than the value of your home and you don't plan on staying put long enough to reverse the loan-to-value imbalance.

• You have not already missed payments on your mortgage or can't show financial hardship due, say, to job loss, pay decrease, illness or interest rate increase.

• You have other properties, investments or assets that could be liquidated to cover your mortgage debt.

• A short sale (The lender forgives a portion of the debt owed if you can find a buyer), bankruptcy, auction sale, refinance or other approach, short of a foreclosure, is a better option.

"You can do a loan modification and not be aware of where you stand. You can get a loan modification for a home you don't want to be in," said Pennington.

A financial, housing or credit counselor can help you determine your best option. Just be prepared to hold down the fort for the 60 to 90 days or more it could take to complete the modification, due to potential complications and document processing times.

There are three basic ways to approach a mortgage modification, according to advice from consumer advocates.

The HUD-approved counseling method

Consumer advocates widely advise homeowners to contact the lender at the first sign of mortgage trouble, and that remains true. However, when it comes to specifically seeking a loan modification, they further advise getting to a U.S. Department of Housing and Urban Development (HUD) non-profit counseling agency before approaching a lender about a modification.

Counseling agencies are generally hardwired to lenders and know what documents you'll need to both determine the viability of a loan modification and to be in sync with a given lender's underwriting requirements. They can also help you prepare your loan modification appeal so it reveals you are in financial trouble and can't afford the current mortgage, but can afford the terms of a modified loan that fits.

"We have direct links to lenders, can save them hours on the phone with the lender, and protect borrower information from unscrupulous people. And nonprofits receiving money from Congress must provide the work free. Others generally charge a fee," said Marcia Griffin, president of the non-profit HUD-approved HomeFree-USA.

The private loan modification route

Because both nonprofits and lenders have been inundated with calls for aid, it may be prudent to hire a private loan modification service to get a foot in the lender's door. Consider the following useful tips if you hire a private loan modifier:

• Shop around. A growing number of real estate agents, mortgage brokers, real estate attorneys and other real estate professionals are offering loan services. Comparison shop for the best deal and the most competent service. Get referrals to private or for-profit loan modification services from family members, friends, co-workers, professionals and others you trust.

• Make sure your choice has a clean record. Consider legal and real estate professionals offering loan modification services only if they have current, unblemished licenses. Also check their record with the Better Business Bureau and their respective trade or professional group.

• Avoid paying advance fees. Get performance-related service instead. Never pay an advance fee if your lender has already recorded a notice of default. You could be throwing good money after bad. It's illegal in California for "foreclosure consultants" or any real estate licensee to collect a fee after a notice of default has been recorded.

• Check your state for similar regulations. Make sure to familiarize yourself with any other rules governing private loan modification services and state rules specific to lenders granting modifications. You won't know if the modification service is adhering to the law if you don't know the law.

• Carefully examine any contract or terms of service before proceeding. If you don't understand the terms or aren't satisfied with what's promised, don't sign. Get help. That could mean reconsidering waiting for a HUD-certified counselor.

"Work with a local company that isn't outsourcing work that you'll never see to Florida, Los Angeles, Texas or Mexico," says Robert Aldana, a San Jose real estate agent who is also president of San Jose-based Home Resolution & Credit Services Inc.

The do-it-yourself way

A do-it-yourself loan modification is not for most homeowners. Attempt it only if you have a sufficient mortgage or consumer financing background, or if you understand that only the lender can give final approval, and if you exercise great caution in choosing the educational materials.

"Can you do it yourself? Sure you can. You can also sell your own home, fix your own roof or replace the engine in your car. But should you?" asks Aldana.

If you choose to go the do-it-yourself route, the following resources may help.

The FDIC offers for free its IndyMac program "FDIC Loan Modification Program Guide — 'Mod in a Box'." The program information specifically targets lenders, but contains a homeowner sample agreement, instructions, frequently asked consumer questions and other useful materials.

The PMI Group, Inc. recently launched an the free Mortgage Options Assessment Tool on its HomeSafePMI web site. According to PMI, the tool "enables homeowners to organize, calculate, and produce reports on their current financial situations prior to meeting their lenders or counselors to discuss solutions to foreclosure."

Otherwise, a plethora of good, bad and ugly do-it-yourself loan modification kits, manuals, guides and courses have cropped up, often with Internet marketing. They represent an unregulated, untested and unstandardized compendium of loan modification information and advice.

Some of it is free for the asking, some requires payment for books, manuals, software and other materials. Many services request your personal information. Whenever any offer requires you to provide personal or private information, be aware of the offer's privacy policy and any terms of service.

Pay particular attention to what the service will or won't do with your information, especially when it comes to sharing it with third parties. When information is shared with affiliates and third parties it's also crucial to learn those affiliates' privacy policies and terms of service.

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Broderick Perkins parlayed 30 years of old-school journalism into a digital real estate news service, the DeadlineNews Group, offering "News that really hits home!"™. The Silicon Valley bootstrap includes the Web site DeadlineNews.Com and the back shop Deadline Newsroom. Contact him at news@deadlinenews.com.

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