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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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The Mortgage crisis is hitting families hard all over the country with the devastating effects of a hurricane, destroying homes, affecting household economies and causing general havoc nationwide. As with all natural and human disasters everybody has a view of how to solve the situation. Some say the current crisis is nothing special, a normal depression after a market bubble where people got greedy and invested badly and that if the market is left to itself it will sort things out.
Others are of the opinion that the government must intervene with taxpayer’s money to bail out desperate homeowners and at the same time jump start the economy. Pretty much everyone disagrees on how the government should do this.

What many agree on is the seriousness of the situation. Recently President Obama said that “The American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods.”

One solution the government is investing strongly in is loan modifications. This program provides financial advice and aid to families struggling to pay their monthly mortgage payments. The plan is designed to reduce monthly payments and incentivize regular payments. To enroll in this mortgage plan homeowners must start with a three month trial. If during the three month trial all payments are made on time then they receive a cash bonus that is used to reduce the principal of the loan. After the trial period the government continues to pay an incentive to homeowners that are regular on their payments which can reduce their principal by $5,000 in three years.

This program is offered through Home Affordable Modification Program (HAMP) which is backed by $75 billion to be used to encourage and aid the loan modification program.

What are the results up-to-date?

By now there are 230,000 modifications that have already been started and the goal for November is to reach 270,000. It is interesting to note that in 2008 only 42% of the modifications by the largest servicers lowered homeowner’s monthly payments. However since March 4 with the help of the HAMP program all borrowers that receive a loan modification have seen their monthly payments reduced. This is a nice change, good news among the pages and pages of bad news that inundate our screens.  However it is sometimes good to understand a situation well even thought it might be bad news in order to make the best of the bad situation.

Although Loan Modifications are being presented as the be all and end all of the current Mortgage crisis, the truth is that only a small percentage of homeowners in trouble actually qualify for a loan modification. According to the website LoanModExposed.com  only 2 percent of homeowners qualify under current parameters.

It is therefore important to understand the qualifications and apply properly because a successful loan modification can reduce the principal balance (the amount you borrow and are paying interest on) reduce the interest rate and change the rate from variable to fixed and many other efficient modifications.

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Mortgage Aid is a nightmare to administer. Well, any kind of aid is hard to administer well and fairly. I have lived some years in Nicaragua a country that pretty much subsists on financial aid from the United States, the European Union and Japan. These countries try to provide Aid in a fair and effective way I’m sure, but this is hardly the case. In most situations the poor never saw any benefits and if they did it was only a portion of the original amount while the powers that be or savvy businessmen take the cream of the aid.

Mortgage Aid in the United States or any other developed country is hardly easier, which is why the Obama Mortgage plan is being played with for the profit of some savvy homeowners that are willing to lie.

How does this work?
The current Mortgage Plan provides help for homeowners that are in “imminent default” they will get help from the government that will rework their mortgage by lowering interest rates and lengthening the loan or even lowering the principal of the mortgage in order to reduce the monthly mortgage payments to under a third of the homeowner’s income.

This idea is great. It helps homeowners that spent too much on their home and helps them avoid foreclosure. Estimates place the number of Americans that will lose their homes at 5 million in the next three years even with government help.
The problem is that borrowers are lying on their income and expenses in order to get a better deal just as they lied to get a better house. It is much easier to make yourself look poor than rich.

The Obama administration aims to help 4 million borrowers, one in fifteen Americans with a mortgage, an amazing goal, through mortgage modifications. Up to now they have helped around 200,000 homeowners with trial modifications. The BIG question is how many of these homeowners really need the help and which are just playing the system.

The thing is that the lying is very easy for many Americans as it might not even seem dishonest to many. Millions of Americans are self employed. They pay themselves a wage from their business. If it is better to have a lower income in order to qualify for Mortgage Aid then they can decide to pay themselves a lower wage and invest more in their business. Many might not see anything wrong in this and I am not sure I could make a compelling argument to browbeat a plumber who decides to invest in a new van and pay himself a lower wage this year in order to get some help on the mortgage.

The real hazard is that those that need help will be pushed aside by savvier homeowners that can play the system and make their cases look “better” and have the resources and the knowhow to get the mortgage aid they want.

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Mortgage modification scams start with a telephone call or unsolicited mail and end with an empty house, a foreclosure and a homeless family. That was the case of The Kennedy’s as published by the KNSD.

The Kennedy’s were struggling to pay their bills. Their mortgage payments slowly encroached on their monthly budget and they began to fail on their payments. Foreclosure was a real possibility. They received a phone call they thought to be their lender explaining them they qualified for a reduction of their monthly mortgage payments of fifteen hundred dollars. They were ecstatic.

Fourteen thousand dollars later they realize it was all a scam. Unfortunately the discovery occurred too late as their house was already undergoing foreclosure. This story is sadly not isolated. Hundreds of desperate home owners that are struggling under a failing Economy are being bullied and abused by a growing number of mortgage consultant conmen that take like looters after a national disaster take advantage of the misery of others.

It is cases like these that have moved the authorities to take serious measures nationwide. This has included coordinated raids on large mortgage modification consultancy companies and the proposal of radical modifications to the debt relief and mortgage modification industry.

Some feel the measures are extreme and that they will be too restricting on the legitmate business for them to carry out their business. This will, according to detractors, limit the help these very people can receive.

However it is tragedies like that of the Kennedy’s that have moved these proposals. The Kennedy’s received an unsolicited phone call, new measures would limit this. The Kennedy’s were guaranteed they had been pre-approved for a large monthly reduction in their expenses, policy changes would prohibit making guarantees when the broker cannot be sure the lender will be willing. The Kennedy’s were asked to pay upfront for services linked to the Mortgage Modification they did not receive, again proposed amendments would protect families like that of the Kennedy’s from these tactics.

The truth is that unsolicited mail and phone calls are not in themselves an evil marketing method, maybe annoying but not necessarily bad. What makes the difference is the vulnerability of desperate households that cannot make their payments. These people need to be protected from ruthless conmen that like scavengers feed on the leftovers of the latest victim.

The deadline for business members and the public to counter these and other policy reforms ends the 9th of October. Will these measures protect people from these and other scams? Maybe. Will these proposed changes put out of business legitimate business that want to make an honest profit from providing a valuable service that is desperately needed? Maybe.

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Despite the governments efforts to provide loan modifications for individuals and families in financial difficulties that are at risk of foreclosing on their loans the mortgage aid seems to be moving too slow for all the families to benefit from it.

This has made many experts to question why banks are moving so slowly to take advantage of a program that is designed to help both the borrower and the lender. The idea is that mortgage modifications benefit both borrowers and lenders as they allow banks to receive payments they would not get if the mortgage foreclosed in a buyers market where the security (normally the house itself) is in negative equity.

However recent research quoted in today´s Washington Post indicates that this only holds true with a certain kind of borrower, the type of borrower that truly can´t pay the monthly mortgage payments at the current level but would be able to pay them if the monthly payments were reduced. This is only one of three types of borrowers though. It seems that with the other two types of borrowers, loan modifications are just not cost effective.

These two types comprise:

1) Borrowers that are in such financial strife that no loan modification or mortgage refinance is going to help in the long run, ultimately they are going to have foreclose their loan.

2) Borrowers that can meet the payments even though this might mean serious financial difficulties, even losing their life savings.

Banks and lenders have little incentive to help either of these demographics of borrowers.

To illustrate imagine if you were a lender, a bank or even a private company that provided loans for a profit. Obviously you demand some sort of security to protect your investment in case the borrower cannot or will not pay, this could be  jewelry, thee deeds of a property or a car. Then one day the borrower tells you he is going through financial hardship and needs a break in his payments, a reduction in his debt or his monthly payments. However you realize that this borrower is not going to be able to pay his loan whether you help him now or not. Negotiating with him now is just going to cost you money in time, work and whatever reduction or break you provide for his loan. On the other hand you could simply foreclose his loan and claim the security without losing nearly as much. What would you do?
Even the kindest philanthropic can see the negative incentive that such a lender would have to actually negotiate a solution with the borrower.

Could  this explain why loan modifications are moving so slowly despite the huge incentive programs the government is providing to encourage loan modifications on mortgages that risk foreclosure.

It seems that Obama´s administration has also seen this flaw in their system and is currently negotiating with banks for further incentives for the provision of loan modifications to the most vulnerable borrowers.

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Making extra monthly mortgage principal payments may be a better plan than a lump-sum approach.

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 A Home Loan Modification

Home loan modification, or mortgage modification are words that are heard a lot lately in the media, in the kitchen and in the office. More and more people are having a struggle to pay their home loans and are looking for a way of lowering their monthly mortgage payments. Others have heard that interest rates have dropped (they have, and a lot) and want to know if they can also save on their monthly expenses, nobody likes to pay more than they have to, right?

But when asked what a loan modification is exactly, many are unsure. In fact some rather surprising definitions have come up linking loan modifications with bailouts, foreclosure and other banking terms that although sometimes related are by no means synonyms.
So what is a loan modification? A loan modification is a permanent change to one or more terms in a loan or mortgage contract. Often loan modifications occur when the borrower cannot afford the mortgage payments due to a rise in interest rates or a loss of income. The loan modification allows the loan to be reinstated avoiding foreclosure of the mortgage, which is bad news for both the borrower and the lender. The loan modification makes the loan affordable for the borrower that can continue to pay the home loan.

Of course loan modifications do not only occur when the borrower is in financial difficulties it can also be used as a way of finding a cheaper loan or as a marketing tool by banks who want to attract more customers.

Whether you are looking for a home loan modification because of financial strife or because you want a better mortgage there are three main ways you can modify your loan. These loan modifications are often combined to create a loan modification the lender and borrower can agree on.

Lower interest rates.
This is often the selling point of a new borrower offering to buy your mortgage and sell it back to you at a lower interest rate. This is the best kind of loan modification for a borrower because it lowers your monthly expenses and the overall cost of the mortgage.

Longer loan tenure.
This means that the lender “allows” the borrower to take longer to pay the loan. This can be good for the borrower because it reduces the monthly cost of the loan. However it has the effect of increasing the amount of interest the borrower pays.

Larger loan.
This is a home loan modification banks love. Increasing the home loan can be a great way of paying for other debts and consolidating them in one big loan. This can be a good idea for borrowers that are paying high interest rates for other debts like credit cards or car loans and would prefer to include it in their lower interest mortgage payments.

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What Is A Home Loan Modification

Home loan modification, or mortgage modification are words that are heard a lot lately in the media, in the kitchen and in the office. More and more people are having a struggle to pay their home loans and are looking for a way of lowering their monthly mortgage payments. Others have heard that interest rates have dropped (they have, and a lot) and want to know if they can also save on their monthly expenses, nobody likes to pay more than they have to, right?

But when asked what a loan modification is exactly, many are unsure. In fact some rather surprising definitions have come up linking loan modifications with bailouts, foreclosure and other banking terms that although sometimes related are by no means synonyms.
So what is a loan modification? A loan modification is a permanent change to one or more terms in a loan or mortgage contract. Often loan modifications occur when the borrower cannot afford the mortgage payments due to a rise in interest rates or a loss of income. The loan modification allows the loan to be reinstated avoiding foreclosure of the mortgage, which is bad news for both the borrower and the lender. The loan modification makes the loan affordable for the borrower that can continue to pay the home loan.

Of course loan modifications do not only occur when the borrower is in financial difficulties it can also be used as a way of finding a cheaper loan or as a marketing tool by banks who want to attract more customers.

Whether you are looking for a home loan modification because of financial strife or because you want a better mortgage there are three main ways you can modify your loan. These loan modifications are often combined to create a loan modification the lender and borrower can agree on.

Lower interest rates.
This is often the selling point of a new borrower offering to buy your mortgage and sell it back to you at a lower interest rate. This is the best kind of loan modification for a borrower because it lowers your monthly expenses and the overall cost of the mortgage.

Longer loan tenure.
This means that the lender “allows” the borrower to take longer to pay the loan. This can be good for the borrower because it reduces the monthly cost of the loan. However it has the effect of increasing the amount of interest the borrower pays.

Larger loan.
This is a home loan modification banks love. Increasing the home loan can be a great way of paying for other debts and consolidating them in one big loan. This can be a good idea for borrowers that are paying high interest rates for other debts like credit cards or car loans and would prefer to include it in their lower interest mortgage payments.

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Buying your first home can seem intimidating, especially when faced with many different loan types. When researching general information about the most popular home loan types, remember it is not as simple as finding the cheapest interest rate. At first taking out a mortgage may appear daunting, but once you break it down, it becomes straightforward. As with any financial decision, the first step in the process is to educate yourself about the process.

What IS a Mortgage?

What is a mortgage really? A mortgage is a lien on the real property that gives the lender the right to take the property by foreclosure if you default on the loan. Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage. Contrary to popular belief, a mortgage is not a loan; it creates a lien on the property, which serves as a lender’s security for the debt. The party who borrows the money is the mortgagor; the party who provides the money is the mortgagee. A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt. .

While the choice of mortgage product affects the amount of the monthly mortgage payments, there are plenty of other aspects of homeownership, such as homeowner’s insurance, property taxes, maintenance, and homeowner’s dues, that need to be factored into your overall cost. The mortgage note, in which the borrower promises to repay the debt, sets out the terms of the transaction:

• The amount of the debt
• The mortgage due date
• The rate of interest
• The amount of monthly payments
• Whether the lender requires monthly payments to build a tax and insurance reserve
• Whether the loan may be repaid with larger or more frequent payments without a prepayment penalty
• Whether failing to make a payment or selling the property will entitle the lender to call the entire debt due

When comparing monthly payments from various lenders, be sure to ask if the lender included monthly taxes and insurance costs in the total payment. Often times if your downpayment is large enough, inclusion of taxes and insurance won’t be required, but you will instead pay your insurance company and real estate taxes directly.

It can not be emphasized enough that preparation is the key to ensure a smooth process. If you are working with a real estate attorney, he or she should walk you through the entire process in advance.

Pre-Qualified vs Pre-Approved

First, its important to understand the differences between a home mortgage prequalification and preapproval. Pre-Qualifying helps you determine what you can realistically afford in order to start your shopping. It provides an indication of what you expect to be qualified for. However, it is not a sure thing and doesn’t carry the same weight as being pre-approved. Home loan pre-approval is a more involved process, which includes submitting a formal application and documentation and provides a conditional commitment from the lender for the exact loan amount. Essentially you are getting your home loan approved prior to selecting a property. A pre-approval will require income and asset documentation. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having the cash to pay for the house.

Formal Application

Once you locate your property you wish to purchase and have a successful offer, it’s time to begin the formal application process. If you were not pre-approved, at this stage you will need to provide more detailed documentation to your lender, including assembling your financial records. Mortgage loan qualification guidelines typically differ depending on the loan program and the lender. The costs of your transaction may vary depending on the loan program you select with your lender, and any changes you decide upon during the loan process. The type of loan you choose is a very important aspect of the loan process, and one you should completely understand before making any kind of commitment. Once the lender receives all this information, they will verify them and start the decision making process. The appraisal is ordered and is done during the same time that the processor is verifying information. Whether it’s during the pre-approval stage or during the approval process itself, the essential question the lender’s underwriters are asking is “How good of a long term risk is the borrower?”

Approval

The loan processing (approval) stage is typically the longest in the process. During this step there isn’t really much you can do but wait. Again, be aware that any material changes in your financial situation can impact this stage, so before you do anything that could have an affect, make sure you discuss it with your lender. When the underwriter is satisfied, the borrower will receive an approval and be cleared to close.

As well as your home loan costs, there are other fees and charges associated with buying a property you need to consider, such as loan origination or underwriting fees, broker fees, transaction, settlement, and third party costs. Costs associated with property surveys and searches may be required. Make sure you look into the closing costs and other costs in detail. It is very important that each client fully understands all of the costs associated with their mortgage loan. Be aware that other fees and costs vary by program and by lender, so when you are shopping for a loan, make sure to get all of the associated costs so you can make a proper comparison.

Closing

The final step in the mortgage process is the closing meeting. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time. The closing is a meeting, most often at the title insurance company, where the lender, homebuyer and seller meet to complete the sale and mortgage process. Closing costs may vary among companies and also throughout the nation because of differing local laws and customs.

A couple of fees to be aware of:

• Origination fee: This is the fee charged by a lender for processing a loan.
• Loan origination fee: Lenders charge these fees for processing of the mortgage agreement and other paperwork.

As with all the fees, rates, and points involved in a mortgage transaction, don’t shy away from negotiating these down or even out of the agreement. Keep in mind that knowing the process and having knowledge of the competitive marketplace enables you to be a more successful negotiator.

Parting Thoughts

With all of the finance programs available to the consumer, from conventional, adjustable rate mortgage and interest only, having an experienced mortgage professional on your side will help you achieve your goal of buying a home and should save you money in the process. Certainly your interest rate is important, but getting the right mortgage, receiving the true costs of the transaction, and getting sound counsel can be far more valuable than a fraction of a percentage difference in your rate. Improving your expertise and knowledge before you start will help the whole loan process be a smooth and relatively painless one.