Barbara Sadler: What Happens If I Can’t Get A Loan Modification?

Loan modification is a change made to the terms of an existing loan by a lender. It may involve a reduction in the interest rate, an extension of the length of time for repayment, a different type of loan, or any combination of the three.

Such changes usually are made because the borrower is unable to repay the original loan. Most successful loan modification processes are negotiated with the help of an attorney or a settlement company. Some borrowers are eligible for government assistance in loan modification.

How Loan Modification Works

Although a loan modification may be made for any type of loan, they are most common with secured loans such as mortgages.

• A loan modification is typically granted to a borrower in financial crisis who can’t repay the loan under its original terms.
• Successful applicants typically are represented by legal or other professional counsel.
• Some consumers have access to government programs that help mortgage-holders.
A lender may agree to a loan modification during a settlement procedure or in the case of a potential foreclosure. In such situations, the lender has concluded that a loan modification will be less costly to the business than a foreclosure or a charge-off of the debt.
A loan modification agreement is not the same as a forbearance agreement. A forbearance agreement provides short-term relief for a borrower with a temporary financial problem. A loan modification agreement is a long-term solution.

A loan modification may involve a reduced interest rate, a longer period to repay, a different type of loan, or any combination of these.
There are two sources of professional assistance in negotiating a loan modification:

• Settlement companies are for-profit entities that work on behalf of borrowers to reduce or alleviate debt by settling with their creditors.
• Mortgage modification lawyers specialize in negotiating for the owners of mortgages that are in default and threatened with foreclosure.
Federal government assistance also is available to some borrowers.

Government Programs

Mortgage loan modifications are the most common type because of the large sums of money at stake. During the housing foreclosure crisis that took place between 2007 and 2010, several government loan modification programs were established for borrowers.

Some of those programs have expired but government-sponsored loan modification assistance is still available to some borrowers. These include:

• Fannie Mae, the government-sponsored mortgage company, has a program called Flex Modification.
• Mortgages insured by the Federal Housing Authority may be eligible for modification through the agency’s FHA-HAMP program.
• Military veterans can get mortgage delinquency counseling through the U.S. Dept. of Veterans Affairs.
Some traditional lenders have their own loan modification programs.

Applying for a Mortgage Loan Modification

A mortgage loan modification application will require the details of a borrower’s financial information, the mortgage information, and the specifics of the hardship situation.

Each program will have its own qualifications and requirements. These are typically based on the amount the borrower owes, the property being used for collateral, and specific features of the collateral property.
If a borrower is approved, the approval will include an offer with new loan modification terms.

• Apply for a modification as soon as possible. To qualify for a modification, you’ll have to submit a complete “loss mitigation” application to your loan servicer. It’s best to submit your application as soon as you know you’ll have trouble making your payments or shortly after you fall behind. If you take several weeks or months to put your paperwork together, a foreclosure could start or continue, leaving you with less time to work out a foreclosure alternative.

• Send in all items the servicer requests. To get protection against dual tracking under federal and some state laws, you have to send your servicer a complete application. An application is complete once you’ve sent in everything that the servicer requested—like a financial worksheet, pay stubs, bank statements, information about your assets, tax returns, and a hardship statement. One of the main reasons that people often don’t get approved for a modification is because they fail to send in every document that the servicer requests. The servicer won’t make a decision your application until all of your items are in. If you leave out just one document—or send paperwork that’s outdated—the servicer will likely deny your request for a modification.

• Be sure to include every page of each required item. When you send your paperwork to the servicer, don’t omit any pages. For example, even if page three of your bank statement is blank, if the other pages say “Page 1 of 3” and “Page 2 of 3”, you need to send all three pages. Otherwise, the servicer will probably consider the document incomplete.

• Keep all correspondence you receive from the servicer. Be sure to retain all written communications you receive from the servicer, such as a confirmation letter that the servicer received your complete application or a letter telling you that certain items are missing. This information could be useful later on if you want to challenge a foreclosure by showing the servicer didn’t comply with servicing laws. (To learn what to do, and what not to do, in a foreclosure, see Foreclosure Do’s and Don’ts.)
• Learn about laws that protect you in the process. Servicers sometimes make mistakes when processing borrowers’ modification applications. Find out about the federal and state laws that protect you in the loss mitigation process so you can enforce your rights if the servicer fails to abide by the law. (Read about federal mortgage servicing laws that protect homeowners from foreclosure.)
Don’t:

• Send illegible documents. When you send your paperwork to the servicer, be sure that all pages are legible. Otherwise, the servicer might deem them unacceptable and deny your application. Be aware that what you consider acceptable and what the servicer considers readable might be different. The servicer won’t put in a lot of effort to decipher words or numbers that are potentially unclear. It’s in your best interest to make it easy for the servicer to read the documents by submitting only clear, clean copies.

• Lose your cool if the process isn’t perfectly smooth. Stay calm, even if you have to resubmit paperwork you already sent in. Resend whatever item the servicer asks for, and send it as soon as possible. If you get irritated with the servicer and insist that you already submitted all required documents rather than resending them, you’ll only hurt yourself. Remember that your servicer is likely getting thousands of requests for modifications—don’t give the staff an easy reason to turn down your request.
• Be afraid to get clarification. Be sure that you’re clear on exactly what items you need to send in. The servicer might request two pay stubs assuming that covers one month of your income. But if you’re paid weekly, bimonthly, or monthly, you might have to send in more or fewer pay stubs. If you need clarification, ask your point of contact. (Under federal law, in most cases, by the time you’re 45 days’ delinquent, the servicer has to assign a single person or a team to help you with the loss mitigation process.)
• Forget to put your name, loan number, and contact information on each page of every document you turn in. Normally, you get a few options for sending your documents to the servicer: by regular mail, overnight mail, fax, or secure email. Paperwork sometimes gets lost, so the best option is secure email. Whatever option you choose, be sure to put your identifying information on every page of each document. Otherwise, the servicer might misplace one page and think your application is incomplete. When possible, send all of your application documents at one time, which significantly reduces the opportunity for items to get lost.
• Assume everything is on track, even after you’ve sent in your complete application. After you send in your paperwork, remain in touch with the servicer. Call at least one time each week to check on the status of your application. Keep notes detailing when you called the servicer, who you talked to, and what you discussed. Also, be sure to ask if the servicer needs any updated documents or information from you.
What Are the Alternatives If Loan Modification Does Not Work for Someone?
What Happens If Someone Defaults on A Loan Modification? Is It Like

Essentially Having A New Loan?

When you do a loan modification, they actually record a new deed of trust in the land records with the terms of the new loan modification. So, essentially if you fell behind in a loan modification, it’s just like falling behind on the original mortgage except the payments are lower and you’re not falling behind as fast as you were when the payments were higher.
The good news is the attorney can still file Chapter 13. Law office of Attorney James Logan has filed quite a few Chapter 13 for people who had modified loans. Because the payments are lower, a lot of times, the Chapter 13 will work out. You can always file a Chapter 13 after getting a loan modification if you want to try to hold on to your house. In some cases, people get second loan modifications and again, if their income situation is changed for the better, they may be able to get another loan modification from their lender.

What Are Some of The Other Alternatives to Foreclosures?

Once you start to fall behind on your mortgage, your first option is to call your lender and see if you can work out either some kind of forbearance. If it’s a temporary collection on your income or you’re just out of work for 6 months but now you’re back to work, and the forbearance means they’ll work out some program with you to catch you up on the 2 or 3 months that you missed. Attorney James Logan can do a reinstatement if you have funds available.
Sometimes, people get a tax refund that’s allowing you to catch up the mortgage. But what you don’t want to do is pull out money from your 401(k) to reinstate your loan, that’s a very bad idea because you’re paying the taxes and penalties on the withdrawal for the 401(k). And if you ultimately end up losing the house, you wasted all that money. So, it is strongly advised never to pull out money from a 401(k) or IRA to catch up loan or catch up a mortgage.
If you have some other source of funds that you can use to reinstate the loan, that may be an option. In Maryland, you can apply for mediation at a certain point during the foreclosure process and the mediation is where you can actually sit down with the lender and a mediator was appointed by the court and talk about options to save your home. Sometimes, that’s successful.
Your ultimate option is to file a bankruptcy. You need to file a Chapter 13 where the attorney can set up a payment plan to catch you up on the back payments on the mortgage or you can file a Chapter 7 and just basically buy yourself a few months in the house and wipe out all your liability on the house and walk away from it. Sometimes, people just realize that they are never going to be able to hold on to the house and they start to buy time and walk away.

Why Bankruptcy Would Be A Better Option?

Bankruptcy may be a better option for loan modification if you’re not too far behind in your mortgage and you have other debts that can be dealt with in a bankruptcy. So, those are probably the two situations where it makes more sense to file a bankruptcy. Unfortunately, by the time many people come to see a lawyer, they’re two, three, four years behind in the mortgage which they can’t afford just the regular payment.
If they file a Chapter 13, they’re looking at the regular payment plus another payment on top of that. So, if you can’t afford the regular payment, how are you going to afford the regular payment plus more on top? But if you’re only a few months behind, which is becoming more common as we emerged from the recession, we’re starting to get past all the crazy day mortgages. Those kinds of situations make sense.
In another case, if you have a lot of debts, a lot of times, we can file a Chapter 7 and get rid of all your credit card debt and other debts that are weighing you down and you can focus on getting a loan modification to save your home.
To learn more about federal and state laws that protect homeowners in the loan modification process, talk to a lawyer. If the servicer violates any of the laws mentioned in this article or treats you unfairly, you might have a defense to a foreclosure, which could give you leverage in the modification process.
To get assistance with completing your application or to learn more about different loss mitigation options, consider talking a HUD-approved housing counselor. You should not, however, hire a loan modification company to assist you.