Mortgage Loan Modification Update

Previous blogs have discussed the mortgage modification options that are available to distressed homeowners, and the steps necessary to successfully accomplish a mortgage loan modification.  Unfortunately, there appeared to be little incentive for the mortgage companies to allow for permanent loan modifications.  Lawsuits have been filed against Bank of America and Wells Fargo related to their failure to participate in the modification process in good faith, or to offer anything more than a temporary loan modification.

In light of these developments, we would recommend the following when negotiating with your mortgage company for a loan modification:

1)      Know the difference between a “trial” or “temporary” loan modification and a permanent loan modification.  Many lenders will only allow for a permanent loan modification if the homeowner has complied with the requirements of the trial modification, which usually lasts for three months.  If the homeowner cannot make the trial payments, then the modification will be denied, and the original loan terms will resume.  Failure to resume making the regular loan payments on a timely basis could result in the loan going into default.

2)      Insist on the trial modification terms being put into writing, and authorized by the lender.  Never make a different payment on your mortgage loan based on a telephone conversation with a lender representative.  The original loan documents state that any deviation from the loan terms must be in writing, with notice to the lender and the borrower.  Failure to obtain the loan mod terms in writing could put the loan into default.

3)      Do not participate in a trial loan modification without knowing the specifics of what it will accomplish.  Is the lender going to permanently reduce the monthly payment or interest rate?  Will any overdue payments be moved to the end of the loan?  Is the balance going to be reduced?  You don’t want to participate in a trial loan modification based on vague and uncertain representations by the lender.

4)      Immediately contact the lender after the last payment is made under a trial loan modification to determine the next step.  Unfortunately, we have run into several instances in bankruptcy cases where the borrower had continued to make reduced payments under a trial loan modification after the trial period had ended.  Because a permanent loan modification had not been approved, the lenders claimed that the loans were in default because the homeowners had not resumed making their regular monthly payments after the trial period had ended.

While there has been much publicity about the various loan modification incentives, the end result for homeowners has been a lot of headaches and disappointments.  If you don’t keep good records, and insist on documentation for any change of loan terms, you may find yourself in default, or even foreclosure.