Troubled homeowners are so worried about losing their home they will do anything to save it. This generally ends up including a loan modification. Loan modifications are a way of reducing monthly payments by a) reducing interest rates, b) extending the tenure of the loan, and c) in some rare cases even by reducing the principal balance of a mortgage.
However, many home owners are starting to realize that interest rates and mortgage payments are not the only things that are being lowered. The credit score of homeowners is being reduced by up to 100 points just for entering a loan modification program. 100 points in a scale that generally goes from 300 to 850 points is a significant blow to a homeowner that has taken good care to protect his credit rating.
The big question is: is it fair? Should it be done?
The main argument housing counselors are putting forward against this practice is the lack of transparency. Most of the times troubled homeowners that ask for a loan modification feel like they are doing the right thing by trying their best to pay for their mortgage despite financial problems. When they realize that there credit score has been hit despite their efforts the sometimes feel cheated.
Are they justified? It seems reasonable to me that lenders and mortgage servicers provide clear information on the consequences of taking on a loan modification. But would a troubled homeowner applying for a loan mod change his mind just because he realizes his credit will be affected? If they do, it probably means they did not really need it to start with.
Why should a loan modification affect your credit rating?
Credit scores and rating are in place to do one thing, help banks and lenders know how reliable a borrower you are. Reliability in this industry is proven by your credit history that is how good you have been at paying your debts, your income and your commitment to the security of the loan, in this case your home.
A credit score is a numeric value assigned to you that qualifies your credit history and how desirable you are as a lender. Now, let us try and detach the emotional aspect of being a troubled homeowner and think about the consequences of a loan modification. A loan modification will in the vast majority of cases mean a reduction in interest, principal balance, or both. This means the bank is losing money. Losing money the borrower agreed to pay. By applying for a loan modification the borrower is stating he or she is struggling to make the payments they agreed to make. Shouldn’t that affect their credit rating, their reliability as a borrower?
Even though applying for a modification will take a chunk from your credit rating it is probably going to shade into insignificance compared to the effect falling behind in your mortgage payments and God forbid, foreclosing on your home. These actions can leave your credit score in tatters for years, and fade into insignificance when compared with a 100 point hit.
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The last three years have seen an amazing growth in the number of schemes designed to help homeowners keep their homes and help them avoid foreclosure. However, this is becoming increasingly difficult as the issue homeowners are having with their mortgages is not so much the interest rate and loan tenures, but with the fact they have lost their jobs, and cannot afford any kind of mortgage payments.
The fact that homeowners cannot afford their mortgages due to unemployment makes it very hard for governments to design the right loan modification or aid that will work for lenders and borrowers. The truth is that in many cases banks will profit more, or lose less, from foreclosures than loan modifications.
A new type of aid has been put forward to respond to the increasing percentage of prime loans that are heading towards foreclosure due to unemployment. These mortgages have little to be improved on; they generally have low interest rates and reasonable payment conditions. However, job loss has made it impossible for borrowers to continue making payments. The new solution is to provide temporary aid to the homeowner until he or she finds a job. This is an easier pill to swallow for lenders than making principal balance reductions or permanent loan modifications. It also sidesteps the long and slow road of loan modification trials.
However the question is what type of temporary aid should be provided. There are a variety of proposals. One is to simply pay the loans for unemployed homeowners that cannot afford their mortgage for a set number of months. This type of aid is already in place in various states.
Another option is to provide these borrowers with loans, the payment of which is deferred to a further date. This option does seem like giving people more rope with which to hang themselves, but it might be good is some circumstances. A third option some banks like Citibank have already started to use is to simply defer payments on a mortgage for a few months. The above mentioned bank has offered in some qualified cases 6 month deferment on mortgage payments to allow the borrower to get back on his or her feet.
This is a great option for the right borrowers because a) it does not cost the mortgage that much, b) does not have to go through such a strict and long selection process and c) actually deals with the problem of unemployed homeowners that do not qualify for loan modifications.
Needless to say many banks are wary of rescheduling payments that may never be made and putting off a foreclosure process that may already be inevitable. This is why the Government should look into the possibility of adding this measure to their flagship HAMP program and think of alternative measures that will deal with the increase in unemployment instead of just focusing on reducing interest rates. Many feel that the government is simply fighting the wrong war, (we are still talking about mortgages by the way) this measure might realign efforts in a direction that might be more productive. However a good selection process will be needed to assure that those that qualify really have the potential to find a job that will allow them to make realistic payments on their mortgage.
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Unfortunately nothing is free in this world; even dying costs around $5,000 dollars, for an average funeral in the US. Applying for loan modifications can be pricey also. Sadly the procedure that could save you from foreclosing on your home and even bankruptcy is also rather expensive, which scares many homeowners off, pushing them further into debt when sometimes they qualify for a loan modification.
The collateral expenses of a loan modification are various. You have to invest large amounts of time in order to apply and get the paperwork together. If you are self employed or are too busy at work to do this in your spare time, it could cost you a lot in lost work or business.
This has made many borrowers hire the services of loan modification companies so they can take care of all the red tape and complicated paperwork. Unfortunately this has created yet another collateral expense for homeowners. These companies can be very expensive, especially for families that are already on the brink of a financial breakdown.
In order to avoid this cost it is worth investing a little time understanding the requirements for a modification and visiting a free counselor near you. Phone the HOPE hotline and ask which free counseling agency is closer to you. They will be able to help you put your paperwork together without charging you hundreds if not thousands of dollars.
Other types of expenses homeowners must think about when submitting a loan modification are hidden costs like inspection fees, and late payment fees. Banks will often require a home inspection before granting a loan modification. As annoying as it is to have to undergo a second inspection on your home it could be necessary in order to pass the NPV test.
The NPV or Net Present Value test is a requirement for any homeowner that is requesting a loan modification. The test quantifies the profitability for the bank of granting the modification. This means that the bank is only going to give you a modification if doing so is more profitable than simply foreclosing the mortgage. Although there are many factors that make up the test, a current valuation of the home is required. It could even be in your interest if there is a new inspection that shows that the current value of the home is below the value of the mortgage.
Late fees are another issue for troubled homeowners that are seeking financial help. It is possible that your bank will grant you a loan modification but charge you for inspection fees and late charges on the side. This could make your total monthly mortgage payments increase even though your modified loan has lower payments.
It is a good idea to ask your bank for a good faith estimate to the cost of the loan modification and the monthly payments that will result from the modification. Make sure they include all expenses and that they include the expenses back into the mortgage. This way your monthly payments will not consist of two mortgage payments, your modified loan and the collateral expenses.
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Forensic Loan Auditing is a fancy way of describing a thorough revision of the documents you signed when applying for your loan. This includes the accuracy of the math in the interest rates and payments schedule, the legality of the terms of the loan and any proof that you were misled in some way.
Why is Forensic Loan Auditing useful?
Forensic Loan Auditing is useful because if your mortgage did not comply with the Federal Guidelines for lenders at the time of signing there is a chance your mortgage was illegal, or at the very least non-complying. This can cause your mortgage to be void and your loan to be wiped out. Admittedly this does not happen all that often, but you can see why servicers and lenders take a Forensic Loan Audit very seriously.
If you took out your mortgage a few years ago, before the current financial crisis, it is likely your loan fails Federal Guidelines on some level. In boom years, like those we had three or four years ago, banks and servicers are very relaxed with their interpretation of Government guidelines. This is especially the case with laws relating to RESPA, TILA or the infamous section 32.
How To Carry Out A Forensic Loan Audit?
There are two ways, the easy but expensive option and the difficult but cheap route. It all, of course, depends if you do it yourself or employ a professional.
Because of the number of loans in trouble forensic loan auditing is becoming a booming industry. However, don’t be quick to believe those that say you can’t d it on your own?
This is what you will need to do:
1) Check the date you signed your loan documents.
2) Check the Federal Loan Guidelines for that period.
3) Compare them with the terms you accepted and the documentation you signed.
The responsibility for any illegal procedures falls on the lender and/or servicer that are required to follow current law, so if you find any discrepancies it could provide you with extra leverage against your bank when asking for a loan modification or even make the loan void if serious mistakes were made.
Lawyers will of course happily do all the work for you, and are likely to do a much better job. However they don’t come cheap. Some loan modification companies include forensic loan auditing as part of their service. Nevertheless make sure you check the costs of using a loan modification company because the Government has provided free counseling companies that are just as good if not better than any paid service provider.
Forensic Loan Auditing is not the Holy Grail of Homeowners but can be a useful tool for certain loans in providing leverage against unhelpful banks and in rare cases even cancel the debt on your mortgage.
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