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HAMP’s loan modification program seems to be finally speeding up its conversion rate from trial loan modifications to converted modifications. However, the 4 million troubled homeowners targeted by the program are not even close to receiving the help they need.

The debate continues on exactly how much responsibility the Government has towards troubled homeowners. Should they simply shoulder their responsibility, lose their home and start from scratch?

One, obviously upset, commentator had this to say about the issue:

How many people seeking home loan modifications used their home as their own personal ATM’S? How many people who are seeking loan modifications bought homes using an interest only ARM, and purchased a home they could not afford? How many people “fudged” their mortgage apps in order to qualify? I have no sympathy for them. I do feel sorry for those who were really victims of poor mortgages, and job loss. I think more people made poor personal choices and want others to bear the responsibility for their poor financial choices.(Quoted from a comment on the RGJ.com, Reno Gazette Journal online edition 31/1/2010)

This opinion is by no means unique. Many, especially those that didn’t buy a home because they felt they couldn’t afford it, feel people are being unfairly shielded from their own bad financial decisions.

However , the distress and misery the current credit crisis has created does make most of us feel the Government has some responsibility to stabilize the situation just as it did when the banks were the ones that needed bailing out.

Sadly, even those that do receive some kind of “financial help” on their mortgage are often just taken advantage of. The media is full of cases of troubled homeowners that qualify for a loan modification just to see their monthly mortgage payments are more expensive and they are deeper in debt and deeper underwater on their mortgage.

The Government has issued some new guidelines that put more pressure on servicers and lenders to reduce monthly payments by extending the loan term to 30 years and dropping the interest rate to current low levels of 2%-3% for a fixed 30 year loan. Unfortunately, servicers were often simply picking up the months the borrowers were behind on and loading them on the mortgage, without actually modifying the loans in any useful way for the homeowner.

The lessons we can learn from these situations are important although often of little value for the homeowners that are suffering the consequences of poor financial judgment and unfair lenders.

Lesson 1.) Do not spend your life savings paying a loan modification company to manage your application. If you do decide to hire such a company check their credentials and find out their history.

Lesson 2.) Never pay for any services before they have been carried out. This is not only illegal in most states it is also rather stupid. Would you pay a day worker on a farm before he started?

Lesson 3.) Contact the HAMP free counseling services before you are committed to a loan. Even if you later decide to go a different route you will at least have one opinion you can use as a benchmark. Contact a lawyer and ask him what your options are. Is there any way to fight the legality of the loan? Do you have any leverage on your bank?

Lesson 4.) Loan Modifications are not the holy grail of mortgage woes, they are not for everyone and they don’t always improve your mortgage payments all that much. Even though it will severely affect your credit score foreclosures and short sales are often a way to have a fresh start and are sometimes more practical than hanging on to a sinking mortgage. They are, obviously, not an ideal option but sometimes they are best of two evils.

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The incentives mortgage servicers receive for managing a home loan are a significant obstacle to loan modification that would help financially troubled borrowers avoid foreclosure, according to a new report from the National Consumer Law Center.

Loan Modification Scams are high up in the priorities of the administration and public authorities. Loan Modification Scammers target some of the weakest members of our society, charging high fees for services that either are not carried out or offers no help to the ailing economy of the desperate home owners.

In the  last months we have seen a number of institutions and AG’s hit loan modification scams throughout the country. The most recent AG to threaten and attack loan modification scammers is John Kroger, Attorney General of Oregon.

Attorney General John Kroger said that Oregons Financial Fraud and Consumer Protection Unit has “opened more than half a dozen investigations” into loan modification companies, two of these loan modification companies received a sanction.

How do these loan modification scams work?

The secret is to target the weak. Homeowners so desperate they will do anything to reduce their monthly payments and save their home. Loan modification companies and consultants will send official looking documents and cold call home owners they know are struggling with their mortgage payments.

This is not to say that all loan modification companies are useless. Some do provide valuable information and help clients make sound decisions with their home. However many use deceptive measures to dupe potential customers. For instance some loan modification companies will send paperwork that will make it look like they are associated with official government organizations like HUD o HAMP. Don’t let them confuse you. Only the bank can approve your loan modification and the government will not contact you through covert methods.

One of the largest loan modification companies, National Homeowners Assistance Services Inc. was also charged with using illegal and covert measures to receive payments they did not work for. In order to set things right the National Homeowners Assistance Services Inc. company was asked to pay $4,000 in legal costs besides changing their code of practice. These measures are designed to force loan modification companies to improve their standards of client service. Another measure some states are trying is demanding upfront bonds from loan modification companies of around $100,000 as a type of license and security for any problems the companies cause to borrowers and other citizens.

Whatever measures the government takes nothing can substitute common sense (not so common unfortunately). Make sure you use reputable companies that are truly experts in loan modification. There have been so many loan modification companies popping up like mushrooms that it seems impossible they are all experts.

Another giveaway for a loan modification company you want to keep away from is unreliable promises. Companies that promise and guarantees the loan modification of your dreams as long as you are willing to pay a “small” fee. These fees tend to be enormous making many homeowners get deeper into debt without getting any results.

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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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Home loan modifications have been presented as the silver bullet that will kill the evil wolf scaring the living daylights out of investors and homeowners. The government does seem to be willing to place its money (or own money) where their collective mouth is. The White House has invested $75 billion of our hard earned bucks into the Making Homes Affordable with the hope that it will prevent 3 to 4 million Americans from losing their home to a bank foreclosure.

Unfortunately the plan is not exactly burning rubber and is off to a slow start. At the moment only 9% of eligible homeowners are taking advantage of the loan mod plan and have modified their loan terms. The government is not happy with these figures and have begun to pressure and arm-twist banks and lending institutions to get their finger out and start modifying. In a recent report the government named and shamed banks that were not pulling their corporate weight behind the mortgage modification program and are not facilitating the modifications borrowers need.

Why is this the case? Why are banks so slow to act?

There are various reasons, most of which we have already discussed in articles here at blownmortgage.com. These include:

1)    Banks are not currently set up for loan modifications. They are set to sell loans and then collect the payments not reduce principals and reduce interest.
2)    The large volume of loan mod applications in such a short period of time.
3)    Lack of information and understanding about the program and how it works.
4)    Mortgage backed securities.

Why mortgage backed securities?

Mortgage backed securities are products like futures and stocks companies can buy or sell. Obviously just like with the purchase of the stocks of a company the purchase of mortgage backed securities provides the owner with a say on how the mortgages are managed.

This is well illustrated by the story of many homeowners that cannot modify their loans because the company that has bought a security backed by their mortgage will not allow them. For instance Wells Fargo may say no to a loan modification you request even though they don’t own your mortgage.

This is caused by ambiguous rules and a rather shady web of interests and ownership. This is rather sad because it means that the group that is more likely to need help, those whose mortgages were sold or used as a security cannot receive the loan modification they need to stabilize their situation.

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Loan Modifications have caused an awful lot of spin in the last year. They have been portrayed as the only hope for cash strapped homeowners, as the Devil incarnate out to rip off desperate debtors. It is also the single largest investment the Government is backing in order to fend off the black clouds of the current Housing and Construction Industry crisis.

So what is the truth?

Are Loan Modifications great news for debtors or a risky business that can leave you in a worst state than when you started.

The answer is both, either or non of the above because it all depends on your personal circumstances and the way you deal with your loan modification.
Loan modifications are different to loan refinancing in that there is not a  change of contract. When you refinance your mortgage or loan you have to start the whole contractual process with all the expenses for the debtor and lender that it involves. Loan modifications keep the old contract with some variations. These variations can reduce the interest rate, principal (the amount you borrowed) reduce the monthly payments and increase the length of the loan. The Government is investing trillions of dollars to encourage banks to get their act together and help borrowers in trouble to modify their loans.
This of course is not an easy task as Banks are not geared to modify loans, but to provide loans and collect payments. The whole structure of a bank is designed to do pretty much the opposite to modifying loans.

However the alternative to a home loan modification is a mortgage foreclosure which is a costly operation for the bank that is rarely the best option, certainly not for the borrower who loses his home. Having said that in extreme cases when the borrower really can’t afford the payments and the price of the home has not dropped considerably it can be better for the homeowner to sell the house and foreclose the mortgage. This means that banks generally open to negotiating a loan modification as long as they are certain that the borrower can afford the modified monthly payments or that the customer can really not afford the current payments. Convincing your bank that this is actually the case is vital. The way you do this is by providing accurate information in the format and portrayed in the light your bank wants to see.

Presenting the information you are asked for and still portraying a picture that will help you get the loan modification you need is not a simple task. It does require an understanding of how loans work. You can do this yourself but you will need to spend some time researching the forms you are asked to fill and decide how to present the facts.

Loan modifications can also be expensive procedures that cost you money you don’t have and don’t provide you any benefits. This is the case of borrowers that do not qualify for loan modifications but are still made impossible promises by dubious loan modification consultants that ask for outrageous fees upfront for their services.

Loan modification companies can provide accurate advice and help you understand the intricacies of loan modifications, helping you decide how to present your case to the bank. However it doesn’t take a rocket scientist to do this if you are willing to spend some time researching your loan and the options you have.

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Sometimes the things that scare us the most are the subjects we know less about, death, darkness, losing someone we love and foreclosure are just a few examples. There is a reason we know little about the things we fear, not knowing is often worse; we always imagine things are worse than they really are. Learning about our fears and finding ways to deal with them is the best policy. This article will aim to shed some light on the issue of foreclosures and what they really are, that way we will hopefully fear them less and learn how to avoid them.

Foreclosure is a legal term to describe the termination of a mortgage or loan. Foreclosure occurs when the mortgagee (the lender) gets a court order that terminates the mortgage and allows the mortgagee or lender to redeem the mortgage’s security, nearly always the home itself. This occurs when the borrower fails to pay the mortgage principal and interest payments; the lender has then the right to force the borrower to either pay the payments he is behind in plus costs or sell the house or some other asset to meet his responsibility of paying the mortgage. When the borrower sells the property and uses the proceeding to pay the lender it is said that he has foreclosed the mortgage.

This rather dry definition we worked through provides some interesting points.

1) A foreclosure is a legal process that must be approved by the courts of equity. 2) Losing the house is not the only way to deal with the situation. The government is trying its best to avoid foreclosures and is willing to help most people that are willing to work hard to find a way around a foreclosure through loan modification and other types of financial aid. Do your homework and make it your job to jump through the necessary hoops to save our home.

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There are few things scarier than losing your home and seeing your family on the street. Unfortunately many Americans and people worldwide are facing this problem due to the worldwide crisis. As we know most governments are doing their best to protect poor families that are at risk of losing their home because they are unable to meet the mortgage payments. One of the measures the American government has provided is the HOPE program.  This program began under the Bush administration and the current administration has just expanded the availability and extent of the mortgage protection program for families.
Sadly many families don’t understand or know about the program and how they can benefit, if you fit this profile what can you do make the most of the helping hand the government is trying to provide. Information is as usual the most powerful weapon whether you are trying to fight a war or pay your home loan. If you are having trouble paying your mortgage and need aid to avoid foreclosure you need to get working on solving your situation.
1)    Find out what your situation is exactly. This means working out how in debt you are, what your interest rate on each loan is, what your prepayment penalty is on your current mortgage and compare it with your current income. You would do well to get all the paperwork you are going to need together. Contact your mortgage provider and ask for an up-to-date review of your mortgage and the details of the contract.

2)    Once you know how bad things are you can start making productive steps towards solving the situation. For instance you should get a feel for the value of your home and compare the current value with the outstanding principal on your mortgage. Once you have this information you should contact your lender. You should contact your lender before you are behind in your payments; this will show you are acting in good faith and want to solve the situation. Lenders can often provide breaks and good re-financing deals to customers that make the “right” decision. If your lender will not work with you, you might need to look to other lenders before your credit rating starts to suffer.

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Are mortgage modifications cost effective?

My last blog detailed the costs and fees associated with a home loan or mortgage modification. If you read the article and you had never negotiated a loan mod you were probably amazed at the amount of fees that must generally be paid in order to get a loan modification, if you had it probably just brought back bad memories, sorry.

So is getting a loan modification too expensive to be worth considering? The increasing amount of people that are taking loan modifications would make you think there must be something in it, and that is generally true.

The cost of a loan modification or mortgage modification is generally between 3 to 6 % of the outstanding amount of your mortgage. This means that if you still owe 50,000 dollars on your mortgage you can expect to pay around $2,500 in fees. That is a lot of money, can a loan modification with an interest rate reduction justify the cost? It can, and we will prove that shortly.

However for many people the main point of a mortgage modification is that they don’t lose their home not saving money, however with the current interest rates you can generally do both. Work out how long it will take for you to break even on your loan modification?

Let’s imagine you negotiate a 30 year mortgage at 5% interest on $200,000 and you previously had a 6% interest rate and that your home loan modification fees amounted to $2,500, which would be a pretty good deal. The first thing you would notice is that your monthly mortgage payments would drop by $126 dollars. This saving needs to be put into perspective deducting the cost of tax. Assuming a 27% tax rate you are left with $91 in savings every month. Doesn’t sound that much when you just spend $2,500 in fees, does it?

However you will break even in only 27 months ($2,500 / $91) every payment after will be saving you 91$ every month from your previous mortgage. This example assumes that you have not lengthened (or shortened) the tenure of your loan. If you increase the time you have to pay your loan this increases the interest you pay and will negate some (if not all) your savings.

As you can see calculating the cost and savings of your loan modification is not rocket science and anybody armed with a little algebra can get into the nitty-gritty of a loan mod.

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What is the cost of refinancing your mortgage?

It is good to calculate the cost before doing something you might later regret. This applies to mortgage modifications, trips to Siberia where you find you don’t have enough for the return ticket or holidays in Paris when you didn’t know a bottle of water cost $10. However calculating the real cost of financial products like loan modifications can be difficult when advertisers are doing the best to attract your business without giving you the important details, how much is it going to cost. This article has the somewhat ambitious goal of clarifying the real cost of refinancing your mortgage or modifying your loan.

The bottom line.

The bottom line is that refinancing your mortgage or modifying your home loan is likely to cost you something between 3 to 6 per cent of your outstanding mortgage in fees. The exact costs vary from state to state and country to country so you will need to do some extra homework to find out the exact costs in your neck of the woods.

Application fee.

This fee gets the wheels of your loan modification spinning. It is the fee banks and lenders charge to get started on your case, ask for credit reports and print the paperwork. The fee can vary from $75 to $300 depending on the bank or lender.
There are also companies that offer to take care of all the paperwork involved in applying for a loan modification, they also charge a fee. These companies can be helpful and successful but there is really no reason why you can’t look after your own loan modification and it will be cheaper.

Loan origination fee.

This is a fee the lender charges to analyze and prepare your mortgage. Yep, I know, very similar to the application fee. This one can be pricey or free depending on the borrower, it ranges from nothing to 1.5% of the pending mortgage.

Points.

A point is an percentage of the outstanding debt, professionals and lenders charge points to reduce the interest of the loan and for other services. How many points are charged is negotiable with your lender.

Appraisal and inspection fee.

Your lender might ask for a new appraisal of the house to make sure it is still a suitable security for the loan. A termite and other bugs inspection may also be required for the same reason. Plan $475 to $1,000 for both.

Attorney fees.

Lenders will generally charge the borrower for the closing of the modification by a lawyer. The price will vary from $500 to $1,000.
Getting dizzy? We’re just getting started you have the new insurances that go with the mortgage, the title search to make sure the house is yours, a final survey of the house’s location and of course let us not forget the prepayment penalty that can range from nothing to 6 month interest payments.

By this moment you are probably thinking that it is simply not worth getting a loan modification, mostly you would be wrong. To find out the savings of a loan modification please read my next blog.

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