5 Reasons Why A Loan Modification May Not Be the Answer for You
When considering whether you should pursue a short sale or a loan modification, homeowners should consider and discuss the following issues with their legal counsel and tax advisor.
•1) Not every loan modification solves an equity problem. If your house is worth half of what you paid for it, a loan modification may not solve your problem, unless it includes principal reduction as a part of it. Bank of America rolled out a principal reduction program in June of 2010, and recently, Wells Fargo Bank announced that principal reduction will be a part of its "pick a payment" settlement with the California Attorney General's office. (This list, of course, is not exhaustive) Also encouragingly, the HAMP program has rolled out the Principal Reduction Alternative. However, if your bank will not offer principal reduction as a part of its loan modification options, or you do not qualify for principal reduction, (and you have an equity problem), a loan modification may not solve your real problem.
•2) You haven't made a payment in a REALLY long time. Ever wonder how your bank will handle the fact that you haven't made a payment in such a long time? Unless they offer the aforementioned principal reduction or payment forgiveness, they will more than likely take the amount of your back payments (along with the penalties for late payments) and stack it right on top of your loan balance, creating an equity problem, or making an existing equity problem worse. If you haven't made a payment in a year or more, this amount can easily amount to tens of thousands of dollars. You and/or your legal advisor should inquire with your bank about how they will deal with the fact that you are not making payments.
•3) Your market is still declining. Here is where consultation with a real estate professional or appraiser can help. Is your market still declining? Even if your bank offers you a principal reduction with your loan modification based on what the home is worth today, if the market is still rapidly declining you could still end up in a negative equity position again soon. So then even if your payments are now affordable, you may still face the inability to sell in a few years if your equity position is in the negative.
•4) You've already been served with a Notice of Default. The foreclosure process should be halted during consideration of a HAMP loan modification. And, if a HAMP loan modification is denied, the servicer should then consider the homeowner for any of their other loan modification options available and/or a short sale (if the homeowner requests it). However, homeowners should be aware that the filing of a Notice of Default in California is definitely a reservation of the lender's right to foreclose. You should be mindful of any deadline in place regardless of your loan modification application. If all your other options have run their course and you are relying on 30 day extensions of an auction date, you could easily run into problems. Will you be able to switch the file into the short sale department if the loan modification is denied 7 days before auction? That could be tremendously difficult, as some banks (as a practical matter) take weeks to even acknowledge receipt of correspondence. Further, if you must submit a complete short sale package (including an offer) in order to be considered, you could then be in the position of obtaining an offer (that your bank will accept) in a very short time period. I have seen a number of homes fall in to foreclosure for this reason.
•5) You really want a clean slate. If what you truly desire is a clean slate, a loan modification may not solve your problem. A successful short sale can help you to avoid foreclosure or even in some cases bankruptcy. If you short sell your property, you may be able to get a new loan in 2 - 3 years under current FHA and Fannie Mae guidelines. Also, under the Federal Mortgage Forgiveness Debt Relief Act of 2007, sellers have a limited window of opportunity (until the end of 2012) for potential tax forgiveness on the short sale of their principal residence. Also, California state tax relief is limited as well until January 1, 2013. These favorable tax laws could be extended, but they also could not be extended. If what you truly desire is a clean slate, a loan modification may not be the answer for you; you could need a short sale to truly wipe the slate clean and move forward with your life.
Unfortunately, loan modifications have not turned out to be a long term answer for some people. It does not take a rocket scientist to figure out what is needed to keep most people in their homes; however, time and time again, the banks refuse and it does not happen. Homeowners and their legal and tax advisors should make an honest assessment at the outset and also during the application process as to whether a loan modification will truly be the answer for the homeowner's financial difficulty. I am a Certified Distressed Property Expert and a Certified HAFA Specialist and I can provide you with a short sale consultation that will include an analysis of current market conditions.
Tni LeBlanc, Mint Properties
Broker/Attorney, Short Sale Agent
CA DRE License # 01871795
(805) 878-9879
Serving Santa Maria, Orcutt, Nipomo, Los Alamos, Santa Ynez, Los Olivos, Solvang, Buellton, Lompoc, Arroyo Grande, Grover Beach, Pismo Beach, and Avila Beach.
*Nothing in this article is intended to solicit listings currently under contract with another broker. Those considering a short sale are advised to consult with their own attorney for legal advice, and their tax professional for tax advice prior to entering into a short sale listing agreement - this article does not offer legal and tax advice.
Copyright © Tni LeBlanc 2010 *5 Reasons Why A Loan Modification May Not Be the Answer for You*
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27 Comments on 5 Reasons Why A Loan Modification May Not Be the Answer for You
As usual....great post (suggested) really clarifies that loan mods are not for everyone. The fresh start point is key....sometimes people just want to hold onto where they are, regardless of whether it's a good idea.
Tni,
What an excellent post! Succinct yet comprehensive. Every borrower considering a loan modification should read your post. It would save many people much money and anxiety before they embark on a loan mod that is destined to fail.
Michael - Thank you. After three years of recommending that clients try that route in a bid to save their home, I haven't seen many success stories either and I've come to the conclusion that unless loan mods get better they aren't for everyone. People should look at their overall financial picture. A loan mod can run the clock on the time they could use to get a short sale done and avoid foreclosure.
Thanks for the suggest Karen - I really enjoyed your article as well and especially the comments! When people who don't REALLY need a loan mod get one (interest rate reduction only), I actually think the bank has done something fairly smart because that person will probably continue to pay. However, unfortunately most people need principal reduction in order for it to make sense for them to keep the home long term and so far I haven't seen a lot of those. Consumers have to keep their own situation in mind in terms of finances and time lines in order to successfully avoid foreclosure.
Dave- Thank you. It's been a long road for us all, and I am changing my opinion about loan mods. I've seen them drive a lot of folks into foreclosure because so much time is wasted. If you truly can't make your payment now, you need to be very honest with yourself about whether a loan mod will help. Run the numbers at 2% (which as I understand it is the best interest rate scenario under HAMP), look at an amortization schedule and see how long it will take to get you to market value on your loan balance. Loan mods without principal reduction just aren't for everyone.
Tni - this is an excellent post for people in the situations you mentioned. The first step is getting 'real' really 'real' with their individual situation and not pretending there is some magic pill or being to embarassed to ask for help. Loan mods for the most part here in AZ have been a joke. I get at least 2 or 3 calls every week asking if there is some magic touch to getting one. We know the answer to that one, now don't we .... Some mods have been short term mods which ended up putting people in a worse place than before because they relly didn't undertand it was short term and/or lost their job or some other problem popped up. With our values down over 50% or more in some outlying areas - unless it's a drastic principle reduction (of which I haven't seen yet) it's a cold day in you know where. Wish it werent' so - but I've learned to deal with reality this past few years and it's not a pretty site for way too many people.
Featured in BananaTude
Great Post, Tni, sellers need to know this stuff and lenders aren't communicating this info to them.
Excellent overview, Tni. I am going to reblog.
Great points - I have seen very few instances where a loan modification actually helped a homeowner in the long run - for those exact reasons. Principal reductions are great in theory, but if anyone has actually seen one I would love to know about it. I have never heard of one actually happening.
Tni ... I don't think I've ever seen an explanation of the loan modification issues as clearly and carefully presented. Thanks for the clarity and for the complete overview. The presentation is level-handed, non-judgmental and timely! Thanks ...
Tni not everyone understands the repercussions of a loan modification. To many, it's not the cure all that they think it is.
Thanks for the feature Anna! California and Arizona are in similar boats. Some homeowners are just too far underwater to be helped by a loan modification especially when you factor in a reduction in income or any of the other economic factors that are affecting people in this recession. I, like you, have not heard of many principal reductions. In fact I've only heard of one and the person's financial and personal situation was so unfortunate that I'm not sure if they could keep their house even after the reduction. I will be happy if the banks change course on this -- but in the mean time I've seen a lot of people fall into foreclosure waiting on a loan modification that fails to save the day.
Toni - I agree it is important to get the information out there and have people think this stuff through.
Jane - Thanks for the re-blog!
Jack - Glad you appreciated it. I put a little time into it because I wanted to be fair and realistic with homewoners who are in this situation.
Charita - I completely agree most people don't understand how its going to work or what it is going to look like. We've had enough experience now to know what the options are going to look like.
Reading you is like going to school. But a fun one too! Always fantastic info. Thank you for sharing!
Modification seems to not work out for most people I talk. This post is great for explaining why this happens and why someone should look else where.
Great blog Tni! I love your writing style, very concise and packed with information. Thanks for the opportunity to re-blog.
Nancy
Tni,
This is quite an exaustive list of why loan modifications won't work. Nailed it right on the head.
Lydie - Thank you! Being in this industry right now is constant learning for us all!
Thanks Chuck - I thought I'd take a shot at breaking it down for people.
Nancy - Thanks for the re-blog - I appreciate it!
William - Thanks! The banks could make them work but they aren't for the most part.
Great post, as usual. Nice explanation of why loan modification won't work for some.
Renee - Thank you. It is important for homeowners to get really real about their options during this time. It is in their interest to avoid a foreclosure, and if you have been hassling back and forth with the bank, it may come up on you very quickly as you become accustomed to living on their extensions. It's important to stop and analyze what may truly be the best course of action for you.
Great blog- very straight up and honest.
Thank you for the tax links!
Christine - Thanks!
Gary & April - You're welcome. Enjoy the reading!