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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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The News is littered with horror stories of homeowners that have been taken for a red tape ride, paperwork is lost, or applications are dropped because a vital piece of paperwork that was never actually requested is missing, all while homes are ultimately and tragically lost.

What can be done to accelerate this process and avoid being a main character in one of these horror stories. The truth is that there are no magic solutions, in some cases loan modifications are simply not an option.

That said, lenders have come up with a kind of formula to speed up loan workouts. If you fit these standards you can get  relatively quick help, if you don’t you must wait for the traditional case by case process. Unfortunately there are no guarantees and seemingly great candidates have also been abused by the system, but knowing the system lenders follow to fast track loan modifications can only help.

So what are the requirements?

1)    Your loan must be at least 60 days past due. Some banks require at least 90 days. One of the reasons for this is that the bank needs to be sure you really can’t afford the loan. If you are struggling but can make the payments Banks are not going to want to throw money away at a loan modification.
This does not mean I am recommending you to not pay your mortgage payments. Every case is different and in some cases you have more leverage on your bank if you have a good record. Check out www.hud.gov to find out where your closest mortgage counseling office is to get personalized advice.

2)    You need to prove you can’t pay your mortgage. Your expenses must exceed your income. Be ready with pertinent paperwork, you will be asked to prove this.

3)    The loan modification must be a long term solution. That means the cost of the monthly payments must be under 38% of your monthly income.

4)    You can’t be in bankruptcy.

5)    A loan modification must be a good deal for the lender. That means that the cost of modifying your loan must be cheaper than what the lenders would lose if they went ahead and sold your home. For instance, if you live in an area where homes did not fall in price and there is a high demand of houses (not sure where that would be, but let’s imagine) then the lenders are very unlikely to accept your lower interest and reduced principal balance requests when they can simply foreclose on the mortgage and sell your home for the same price or even a potential profit.

6)    You need to be able to prove that you can make the modified payments and that you will not default again.

Again, these requirements will not guarantee an approval but will increase your chances. The main point you need to get across to your bank or whoever the owner of your loan is, is that you are a good investment. That you are worth more money as a client than your home is worth with a foreclosure.

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When HAMP started functioning just a few months ago everybody said it was working too slow that it would never come close to Its ambitious goals. Last Thursday nearly a month before the deadline self imposed by the administration HAMP has enrolled 50,000 troubled home loans for trial loan modifications. Whatever your view on the credit crisis and the angle the Government is dealing with it you have to grant that they have really given this scheme all they have.

After a slow start where few banks were even pretending to try to provide loan modifications and trial loans modifications were trickling few Obama’s Administration got tough on mortgage providers and banks. This was carried out through the friendly diplomacy Obama is becoming famous for and some good old fashioned leaking to the press the dismal figures of the worst service providers at providing loan modifications.

The question now is if the initial success at least in numbers of the loan modification is enough to allow for optimism. Let’s have a brief look at what loan modification programs have done and compare it with what is needed.

An estimated 16 percent of troubled borrowers, which is someone that is 60 days behind in his payments, have been placed into trial modifications. Trial modifications are a three month period where the homeowner is expected to keep up with his payments without a glitch. If the borrower is regular in his payments he can keep the loan modification for the term of the loan with some extra bonuses thrown in. All HAMP loan modifications must provide affordable monthly payments to homeowners. By affordable we mean monthly mortgage payments must be below 31 percent of their monthly income.

HAMP and other loan modification programs were designed to help homeowners locked into subprime mortgages with high interests they couldn’t get out of or modify because the value of their homes had fallen drastically taking away all leverage for a possible change of loan or modification.

That was the situation 6 months ago when loan modification programs were starting. According to economists the issue now is not so much that borrowers are locked in subprime mortgages and are defaulting on their payments. It is prime mortgages that are defaulting and prime borrowers that are becoming delinquent on their payments. The loan modification programs now in place provide little help for borrowers that can’t pay their mortgage payments but have excellent interest rates. The only real aid these programs can afford is if the service providers are willing to defer or forgive some of the principal. The former option leads to balloon payments, not always a great deal for the borrower and the latter is unlikely to say the least.

If this analysis is correct we would be dealing with a set of loan modification programs that might or might not be good at what they were set out to do but are no longer needed or at least the main problems cannot be addressed with them. This is unfortunate considering how many billions of dollars are being thrown at them. A lot of this cash is not even going towards the borrowers which could be seen as a way to inject cash into the economy  directly to the families that need it but is paid to corporate banks as compensation for rewiring their business to speed up loan modifications.

Obama’s administration response to this argument is that loan modifications is only one of the ways they are fighting the credit crisis and that it is doing the job is was set out for and is on target to help up to 4 million troubled loans.

Related posts:

1. 500,0000 Loan Modifications: Nobel Prize Not The Only Target Obama Hits Early
2. Loan Delinquencies Fall As Banks Get Serious With Loan Modifications
3. Loan Modifications, Story Of Struggle For Banks And Borrowers Alike

Related posts:

1. 500,0000 Loan Modifications: Nobel Prize Not The Only Target Obama Hits Early
2. Loan Delinquencies Fall As Banks Get Serious With Loan Modifications
3. Loan Modifications, Story Of Struggle For Banks And Borrowers Alike