THINKING ABOUT A LOAN MODIFICATION….THINK AGAIN.

For every short sale I handle, I personally interview the potential clients. One of the questions I ask during each interview is whether the borrower has applied for a loan modification. Where approximately 7 out of 10 potential clients do apply for a loan modification, some as many as four times, very few succeed in having their loans modified. Of those that are successful, the modified terms are miserly and rarely provide material relief. I have been told that loan payments have been reduced by as little as $50.00 a month, or that the term of the loan was extended from a 30 year term to a 40 year term, or that there was a very small reduction in interest rate. In the five years I have been handling short sales I have yet to hear of any lender reducing principal or waiving arrearages which would provide true relief.

I found this anecdotal information mystifying since I frequently come across press releases from lenders trumpeting their success in modifying loans. An article recently published in The New York Times investigated the troubling details behind modifications processed under the federal government’s Home Affordable Modification Program (HAMP) and solves the mystery. This article indicates that the lenders participating in the HAMP program have rejected four million borrowers requests for assistance, or 72 percent of applications. The article goes on to reveal that a Special Inspector General of the Troubled Asset Relief Program has disclosed that while in 2009 it was estimated that HAMP would help up to four million distressed borrowers, six year later just 887,001 borrowers are participating. These are terrible numbers, right? It gets worse.

The New York Times journalist went on to interview a legal aid lawyer who represents troubled borrowers. It took this lawyer, Jacob Inwald, Esq., just two minutes to send the journalist court documents showing abusive tactics seven borrowers in New York City recently faced. Mr. Inwald stated that a loan modification virtually never gets approved on a first attempt. More alarming than even that is the possibility that lenders are financially motivated to deny modifications. A delay in modification leads to additional interest and fees that can be charged to the borrower and increasing the amount owed on the mortgage. Court documents in a recent case involving a unit of Wells Fargo revealed that a borrower’s loan modification request was denied four times over two years adding $40,000.00 to his loan balance. The Court in that case stated that the bank’s conduct “evinces a disregard for the settlement negotiation process that delayed and prevented any possible resolution of the action among other consequences, substantially increased the balance owed” by the borrower. The Court went on to bar the bank from recovering the $40,000.00 in incurred during the drawn out modification process.

Would I discourage interested individuals from pursuing a loan modification? No, I would not. I think oftentimes it is important for distressed borrowers to feel like they have exhausted all options before resorting to a short sale. With that said, I feel it is my obligation to share with them what a low chance of success they are facing and to keep their expectations low.