(Note: In part one of this two-part series on loan modification programs, I’ll set the table by examining loan counseling companies, and see what, if anything, they bring to the table. In part two, I’ll offer some concrete steps to take when working with a qualified loan modification agency.)
Rummaging through my daily stack of reading material, I couldn’t help but notice more bad news in the housing sector – but a sliver of good news, too.
Let’s get to the latter first, because Lord knows we can use some sunshine.
After a brief bump-up in mortgage rates, we’re starting to see them slide back down again – to about 5% mid-week. According to MainStreet's partner site, BankingMyWay.com, rates were up around 5.29% last week, but have fallen significantly. In the process, that could open up some new buying and refinancing opportunities for home mortgage consumers. (You can always get regular updates on home mortgage rates at BankingMyWay.com.)
But the bad news threatens to sink the good news. The U.S. Commerce Dept. says that new home sales fell 14.7% in December, as buyers remain on the sidelines. Things have gotten so bad that one Arizona builder offered to kick in a $200,000 Bentley to anyone buying a big multi-million dollar home. Hey, throw some Super Bowl tickets in the glove compartment and I might be interested. (By the way, in a sign of the times, Super Bowl tickets are trading way BELOW their face value. If my Eagles had made it maybe that wouldn't be the case).
Almost all bad news, which brings me to my point. With home sales and home values down, we’re seeing an increase in the number of troubled homeowners who have seen the value of their homes fall below the amount of money they have left on their mortgage loans. Real estate types call this unfortunate situation being “underwater.”
To avoid being capsized, millions of anxious homeowners may be turning to loan modification programs, where homeowners and banks get together and try to negotiate a more user-friendly loan. Home modification programs were created, for the most part, by the Federal Housing Financing Agency (FHFHA). The goal was a noble one. With home delinquencies tripling in 2008 (including prime mortgages) and U.S. foreclosure rates up 150% since 2007, tossing troubled homeowners a lifeline seems like a good idea. After all, even home lenders want to keep people away from foreclosures and in their homes.
That said, I’ve got some issues with loan modification programs and some tips to cut a better deal, if you decide to go that route.
First, don’t expect miracles with a loan modification. Actually, don’t expect them to work at all in a lot of cases. According to the Comptroller of the Currency, most of the 200,000 or so borrowers have missed at least one subsequent payment on their mortgages since having their loan modified. And that was in 2008, when things weren’t arguably worse than they are now. Plus, banks and lenders aren't exactly diving head first into these programs. They don't want to take another financial hit, and, since many mortgages come with separate home equity debt, they're often too complex for lenders to handle.
What does that tell me? That once you’re on your way to a home foreclosure, it’s really difficult to pull out of it before you crash.
Then there is the growing issue of loan modification scam artists. I really hate these guys and they are everywhere! In my book, Real Money, now in paperback, I point out that anyone who would prey on financially-strapped consumers when they are at their most vulnerable has a special place reserved for them in Hell. The U.S. Department of Justice is warning of a significant rise in mortgage workout fraud, where unscrupulous companies swear they’ll “fix” your potential foreclosure problem, or help you refinance into a more affordable loan. Some of these scumbags even ask homeowners to make mortgage payments directly to them, or even hand over the property deed for “protection.”
Don’t fall for it. The Justice Department has a short list of red flags to watch out for if you’re shopping for a loan modification deal.
Watch out if your loan modification company . . .
• Calls itself attorney based or an attorney model company.
• Has no refund or partial refund policy if your loan modification is not a success.
• Has no 800 number, is hard to reach, and has no contract or upfront agreement.
• Tells you to make your home mortgage payments directly to the individual or company.
• Tells you to transfer your property deed or title to the individual or company.
• Wants to conduct a pricey “forensic audit” of your original home loan, usually at a cost of thousands of dollars.
Watch out for big program fees, too. Some loan modification firms charge $2,000 or even $3,000 to handle your case. With no direct federal law stopping these guys, they’re getting away with cashing in on big fees without delivering on their promises. That’s especially true if you pay up front – that’s cash you’ll likely never see again.
As I noted above, one popular scam has a loan modification company charge you a few hundred bucks to produce a preliminary “audit” of your original home loan. If the firm finds a discrepancy, they indicate the mortgage loan could be invalid and usually refer a client to a lawyer, who charges a tidy four-figure retainer to sort it all out. In some cases, a more thorough audit, known as a “forensic audit” is advised, with an additional price tag of $2,000 or $3,000 in many cases.
Like I said, a lot of these sharks will keep taking a bite out of your wallet if you let them.
There is some hope. If you want to go forward, you do have some legitimate options in the loan remodeling market. The U.S. Housing and Urban Development Office of Housing provides distressed homeowners access to over 2,000 qualified non-profit housing counseling agencies. HUD has an easy-to-use map to help you find a good counselor. By “qualified”, HUD means the counseling agency must have at least one year of experience in dealing with loan modifications.
Some more good news. Uncle Sam is really starting to crack down on scam loan modification outfits. If you think you’ve been a victim of loan fraud, the U.S. Treasury Department advises you contact the local office of the United States Trustee. According to the U.S. Justice web site, the United States Trustee is a Justice Department official who monitors the bankruptcy system. Check it out.
Like I said, it’s not pretty to see a troubled homeowner kicked while he’s down. But that’s exactly what a lot of these shady characters are doing under the guide of “loan modifications." Don’t let it happen to you.
In part two of my series on loan modifications, I’ll walk you through the entire process, from eligibility requirements to the forms you need to fill out to win a home mortgage “do over.”
If you act smart, avoid the scams, and focus on what works, a good loan modification deal isn’t out of the question.
Especially if you do it the Cramer way.
—Brian O’Connell contributed to this article.