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Loan Modifications are a matter of general interest to many of us, especially the 9 million plus in United States that are struggling with foreclosure and could lose their home. Unfortunately many don’t understand loan modifications and what is worse can’t identify crooks that are out to trick borrowers and pour more misery onto already desperate households.

Information is as always power, in loan modifications not knowing what you’re doing could spell disaster, cost you thousands of dollars and still lose your home.

This article sheds some light on some of the biggest examples of lies, scams and misinformation in the loan modification industry.

1)    You have to be behind your payments to qualify for a loan modification or aid.
This is simply not true. If you can avoid getting behind in your payments without falling into poverty it is best to keep up with payments. The moment you become a delinquent borrower your credit score receives a strong blow. The government helps borrowers that are struggling with their mortgage payments before they become delinquent as long as they qualify and are willing to follow the directions of the mortgage aid plan. It has been the case of banks in the past to only allow loan modifications for borrowers that are delinquent but this is not the case with the current loan modification programs.

2)    All mortgages can be loan modified.
It would be nice but unfortunately this is not true either. The government is only offering financial aid to help home owners to modify their first trust deeds (not the second, third…. Mortgages) You can get these mortgages modified, there is no law against it. However banks have no incentive to do so, and it is hard enough to get them to modify the loans they get paid for their trouble.

3)    I can’t do it by myself; I must get someone else, a professional, to do it for me.
It is amazing how many experts have appeared from nowhere in the area of loan modification when only a couple of years ago it was a practically unknown sector of banking. The fact is thought, that whatever loan modification “experts” tell you nobody can guarantee you results. Only the mortgagee, the person lending the money (this is not always the banks) can approve a loan modification. The process is slow and frustrating but you don’t need an expert to do it, you can do it yourself.
It is true that “experts” can provide help on how to fill in forms and make the right decisions. However there are “free” organizations that provide that kind of help for nothing.

4)    The “value” of my house has dropped so they must reduce my principal.
It is very hard to get your principal, or the amount you owe to the bank, reduced. Banks will often reduce your interest rate, monthly payments or even increase the length of your loan but getting a reduction on your principal is rare to say the least.

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The las loan modification company to have been hit by the Government is Debt Relief USA. Texas Attorney General Gregg Abbot is set to recover $4.6 million for former customers of Debt Relief USA, an Addison based company that filed bankruptcy earlier in June.

Debt Relief USA claimed, as so many other companies, to help consumers to reduce debt and monthly mortgage payments. The idea was that Debt Relief USA would use its expertise in the sector of loan modification to get a better deal for customers.

Besides the illegal business practices Debt Relief USA carried out with its customers before bankruptcy the company collected set aside money from its customers as part of the bankruptcy process. This is of course not legal. Attorney General is working to change the bankruptcy to a liquidation. AG Abbot is also seeking to enforce penalties for deceptive trade practices. Debt Relief USA had 2,500 companies which according to AG Abbot did not receive the help they paid for.

What can you do to avoid Loan Modification Scams?

Let us start by reassuring you that loan modification online can be helpful and even save you money. However if you use the wrong company you could end up in the street earlier than you thought.

There are a few signs you can spot early on to know if you are dealing with a scam artist when buying a mortgage:

1) They promise you, you will save money by reducing your debt capital. This is an impossible promise to make because it does not depend on the loan modification consultant. Banks are the ones that revise and decide on these applications.

2) They ask you to stop paying your monthly mortgage payments and to use that money to pay them. This is more common than you would expect. Before you know it you are months further in debt with nothing to see for it. The loan modification company might ask you to pay up front to get the things started. It is illegal to ask for payment for work that is yet to be done so say no to this practice.

3) They cold call you and promise you have been pre-approved. This is a very popular trick as it targets those what are so in debt they are struggling with and are less likely to a second check.

4) The government has set up advice centers that provide information for free. It is often the case that these free information providers are better than any paid for loan modification consultant. Many borrowers follow the common sense idea that paid for services must be better than the free ones but in this case it is more often than not a mistake.

5) They promise you your credit score will not be affected. If a loan modification consultant tells you that just run for the door and go home, or if they cold called you hang up. Banks only modify their loans if people can’t pay or are struggling to pay their loans. In order for a loan modification of this type to go through you need to tell your bank you can’t pay what you borrowed. Your bank is then obliged by law to report you and of course that will hit your credit score pretty badly.

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Loan Modification figures right now are scary. According to one survey one in eight U.S households that have a mortgage are in foreclosure or will be soon. This puts great pressure on Government Institutions that are trying to help ailing home owners while the numbers just add up. It is like trying to build a dam while the river is still flowing.

As it often happens the problems Loan Modification Programs face are changing. While the focus of Loan Modification programs is on subprime loans (high interest loans generally purchased by people with low credit rating) a new demographic of struggling home owners is appearing.

Foreclosures of Sub prime borrowers that by some accounts ignited the banking crisis are actually slowing down while borrowers with good credit records are deteriorating faster due to falling home prices and job losses.

The MBA (Mortgage Bankers Association reported last week that 13.2% of mortgages on homes with one to four units were at least a month overdue or actually undergoing foreclosure. This a rather steep rise from 12.1% in the first quarter.

These figures are disappointing as many expected foreclosures to drop as home sales have picked up in the last months. However some analysts have commented that we shouldn’t expect significant improvement until 2010 when the economy really starts to improve.

This shift from the decline of sub prime borrowers to prime borrowers is illustrated by the percentage of prime and subprime foreclosures in the last year. Last year 44% of foreclosures were from prime mortgages, now the figure is around 58%. Last year 49% of foreclosures were from sub prime mortgages, now it is 33%. While sub prime mortgages are recovering, prime mortgages are suffering even more.

What can we learn from this?

It could be good news for the measures the administration. We could read this shift as proof that the demographic the administration has chosen to focus their energies on is benefiting from that help and digging itself out of the whole while the demographic that is not highlighted in the programs measures continues to fall.

It is interesting that more than 235,000 borrowers have started a three month loan modification trial under the current administration under the effort of the administration to reduce monthly mortgage payments. But do these loan modifications target the real problems.

Most of these loan modifications target loans that reset to higher interest rates or to home owners with  high debt to income ratios. In other words these loan modifications seek to help people who fell for high interest mortgages when the housing industry looked like it was going to soar forever. The idea behind the loan modification programs is to allow borrowers to benefit from the current low interest rates.

However prime borrowers that have gone through dire straits struggle to receive the benefits of this program.

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Loan Modifications complaints have inundated the web and are starting to become background noise for those that are not involved in trying to get a loan modification. Recent reports from the Treasury department have reported who are the movers and who are the slackers in the loan modification industry.

One of these slackers was Wells and Fargo that pretty much leaded the list of worst mortgage providers when counting the percentage of eligible homeowners that had received a loan modification. The negative report from the Treasury department was not  the only complaint Wells and Fargo received.
KPHO recently reported about Mrs Batchelder. She was one of many viewers that complained about Wells and Fargo after viewing a news report from CBS 5. Mrs. Batchelder family hit financial rocks when her husband lost her job in 2007 and was forced to accept a lower paying one. They then started the slippery path of digging into family savings and selling unnecessary things to pay for the mortgage and meet medical expenses.  Mrs. Batchelder has been trying to reduce her mortgage payments for over a year in a desperate attempt to stay in her home with little success.

These and other negative PR reports have forced Wells and Fargo into action. Wells Fargo Executive Vice President Mary Coffin that works in the Home Mortgage Servicing Division acknowledged that the situation was not acceptable and that customer service in the Phoenix area was not up to scratch. She is reported to have said: “During the past few months we know there have been instances where it’s been unfortunate… where we haven’t appropriately communicated at a time when they’re anxious and they are going through a very difficult time in their life.”  “We want to change that… and get this taken care of and provide the service they deserve”.

A collective hear, hear is probably echoing around Phoenix. The hope is that this is not a matter of just words and mortgage providers get their act together on loan modifications and help home owners to get their lives back in track.

When asked about the terrible record of Wells and Fargo in loan modifications she replied “We’re behind the program. We want to continue see those numbers increase. But while doing that, we have continued to provide other modifications,” said Coffin.

It would be interesting to know what “other” loan modifications she is doing when the government is actually paying them to carry out the loan modifications the Government’s Loan Modification is backing. According the Mrs. Coffin Well Fargo completed 240,000 modifications but only 20,000 were represented in the figures from the Treasury Department.

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Homes continue to be more affordable than they have been in nearly two decades.

Sales of existing homes rose in July for the fourth consecutive month, lending support to economists who argue a recovery is near.

Loan Modifications has been the flavor of the month in the finance news sections for some time now and August was no exception. We started the month with the government’s report on mortgage services participating in the government’s loan modification program. The administration reported how unsatisfied it was with the progress and that mortgage providers had been inconsistent in their efforts to modify loans which is a polite way of saying they were doing a rubbish job.
The Treasury department also reported the number of loan modifications and trial modifications that were being carried out. The picture was not great but it is very likely that the real picture is far worse.

The Treasury department prepared its figures by comparing the number of trial modifications each bank or service provider had started with the number of loans eligible for the loan modification program. All is clear up to there. The glitch occurs when you realize that only borrowers that are 60 days or more behind in their payments are included as “eligible borrowers”. The real number of borrowers in desperate need of a loan modification is much larger.
Is this a small discrepancy with the real story, just a different way of describing the situation? Hardly.

The Making Home Affordable program included in its data homeowners that had already defaulted or will likely default “imminently” which includes those that have not missed a payment yet. This is very different when compared with what the Treasury department did and the discrepancy is by no means small. For instance in the first quarter of this year 8.8 percent of mortgages were 60 days or more delinquent but there was an additional 3.25 percent between 30 and 60 days according to the Mortgage Bankers Association National Delinquency Survey. If we counted those that were just on the edge of becoming delinquent the picture just gets worse and worse.

The Treasury Department reported that 9 percent of the eligible borrowers were being helped by the loan modification program. However the real figure is really between 5.9 percent and 7.8 percent if we use the Making Homes Affordable figures.
The change in accounting methods is caused by what the Treasury Department wanted to highlight; the number of desperate homeowners that are already  in trouble that are being helped. Up to now over 235,000 homeowners are involved in a three month trial modification and the goal is to reach 500,000 by November.

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The number of Americans who have fallen at least 30 days behind on their home loan payments inched up slightly between the first and second quarters of 2009, but jumped 44% compared on an annual basis, according to an industry report.

Loan modifications are such a complicated but vital tool for homeowners in trouble we cannot afford to play ignorant. The trouble is that for many people to do research in home loan modifications or refinance is so overwhelming they prefer paying a complete stranger to do it. This is not necessarily a bad idea if you choose the right person or company but that is a difficult task in itself.

Scaring people into doing something is not necessarily the best way forward but hey it worked for the Inquisition so we are going to have a shot at it. The following stories are of real people like me and you that went through hard times and could not or did not deal with things the right way.

Loan Modification Nightmare 1. Signature Required.
Lost paperwork when you are trying to modify your loan and in desperate need for lower monthly payments is a nightmare. When it happens 9 times it is beyond the joke. This was the case of one borrower in Florida. Washington Mutual lost their paperwork 9 times during their loan modification process.

Fortunately for them they were savvy borrowers and sent all the paperwork signature required so there was no question who had lost the paperwork or not sent it. The process ended up lasting 1 year with endless hour long screaming sessions over the phone. The advice from the Bank was not always of the highest caliber. On one occasion they advised the couple to stop making payments because the bank could not help until the couple was 2 or 3 months behind in payments

The worst thing is that banks are actually paid by the government to manage loan modifications. The lesson from this nightmare is that you should always keep copies of paperwork and send “signature required”.

Loan Modification Nightmare 2. Get behind in your payments.

One of the nightmares of losing your job is the insecurity that goes with it. A loan modification that reduces your monthly payments to a manageable level seems just what the doctor ordered. The problem is when banks or loan modification consultants ask you to get behind in your payments before they can help you. Getting behind in your mortgage payments will make a delinquent borrower and destroy your credit rating.

Loan Modification Nightmare 3. Banks that ONLY want to help themselves.

In some scenarios banks can actually benefit from a foreclosure. The costs associated with short selling the home and the added fees you are charged could actually be profitable for a bank. Another similar nightmare is when banks only allow you to apply for certain loan modifications. Wells and Fargo for example have been reported to only offer three options to borrowers in trouble, a short sale, a quick deed or a loan modification with delinquent repayment even if the borrower is not behind in his payments.

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Loan Modification companies have been in the limelight for the last few months and for once that is probably not a good thing. The adage “there is no such thing as bad publicity” might fail in this occasion when all government institutions are teaming up to put out of business shady loan modification companies.

California Attorney General Jerry Brown said last Wednesday in his best cowboy language that he was “coming after” loan modification companies that were on the fringe of illegal activities. Mr Brown sent letters to 386 loan modification companies and instructed them to register with the Attorney General office and post a $100,000 bond or face criminal charges. Up to now there has been no loan modification that has registered. Attorney General Brown’s fighting talk did not stop there. He is reported to have said: “If you pay these people, you’re not going to get it back. They’re not financially solvent”. The reasoning is that if they are not willing to pay a $100,000 bond they are probably not a financially viable company and are just out for the quick buck. The worst part is that these companies are probably doing more than duping homeowners for loan modifications they can’t deliver. If they are willing to break the law in that way they are probably happy to do it in other ways.

The situation with the loan modification industry is probably just the peak of the iceberg. AG Brown’s language bordered on the humorous when he warned shady loan modifications: “We’re going to find that, too [the other criminal offences]. I would recommend anybody in this business get out of town, because we’re coming after you”. These statements come after AG Brown formed part of a nationwide raid on large and small loan modification companies and consultants. The message is clear, the government is struggling as it is to help ailing homeowners to save their homes and don’t appreciate conmen making things worse for desperate mortgage owners.

How to Spot a Shady Loan modification Company?

1) They offer hard to believe deals and guarantee results. Big giveaway as nobody can guarantee a loan modification, it depends on the bank that ownsthe loan.

2) They demand up front payment. This is actually illegal. Loan Modification companies cannot demand payment for services that have not been carried out.

3) They tell you to stop communicating with your mortgage provider and to stop making payments. This is the worse thing you can do. It will destroy your credit rating and really annoy your mortgage provider. Two things you really don’t want to do.

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