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What is a Loan Modification and What Questions Should I Ask?

By
Services for Real Estate Pros with MFI-Miami

There is a new industry rising from the ashes of America's imploding mortgage industry and it's called Loan Modification.  Loan modifications have become a viable option for many distressed homeowners many of whom are considering abandoning their homes because they are upside down in their mortgages or just simply can't afford their payments. 

What is a loan modification?  A loan modification is as the name suggests a modification of your current loan without going through the process of refinancing our home or property.   The responsibility of a loan modification company is to act as a negotiator for you with your lender.    Because a new loan is not being written, many states have not instituted or modified their mortgage and banking laws to regulate the loan modification industry.    This means anyone can open a loan modification company, even those who have revoked mortgage and real estate licenses revoked or have multiple felony convictions. 

States such as Florida and California, two states still suffering from the fallout of from being at ground zero of the lending implosion, have begun to reign in loan modification companies by requiring licensing and background checks.  Unfortunately, in the rest of the country, it's still caveat emptor or "Buyer beware". 

Below is a list of questions you should ask when considering a loan modification company:

•1.       Have you or any of your employees ever been convicted of a felony? 

You can follow this up with do you do criminal background checks on your employees?  If they have employees with criminal records or they don't do criminal background checks, look for another company.

•2.       Do you have a background in mortgage lending?  If so what is it? 

This is always a good question to ask because it shows the level of their competency and how they operate their business.

•3.       Can you provide references?

Don't be afraid to ask to speak to real people.  Some companies will post questionable testimonials on their site signed by "Homer S.", "Monty B.", "Ned F." or "Moe S." For all you know the owner or of one of his employees could have written these testimonials.

•4.       Is your processing done in house or is it contracted out? 

This is a good question because it will tell you if the company is acting as a "middle man" and simply collecting a referral fee.  Some services are legitimately contracted out such as the loan auditing or fraud investigating.

•5.       Do you have an attorney on staff? 

This is a great question for two reasons.  If they say, yes, then ask for their name and feel free to check them out with the state bar association.  Having an in-house legal staff also gives the loan modification company legitimacy because it means they can handle any legal situations that may arise during the negotiations of the modification.  If the loan modification uses outside attorneys, it's a sign that the loan modification company could be acting as a soliciting agent for a law firm which is illegal in most states.   Consumers also need to keep a watchful eye on attorneys who allow the loan modification company's staff  to use their letter head and fax cover sheets.  In most states this considered unethical behavior by the attorney.  If you suspect this do not hesitate to contact the state bar of where that attorney is a member.

•6.       Do I need to be late in order to make this work?

No.  Although it may help expedite the process in certain cases, it is not mandatory

•7.       How long does this process take?

It can take anywhere between two weeks to six months depending on the lender and the complexity of the file. 

•8.       If I can't get a modification completed - what can be done?

There is a whole menu of resolutions available.  There is litigation (in cases of deceptive practices), short-sale, short-payoff, deed-in-lieu, or forbearance.

•9.       Are there any guarantees?

Be careful of loan modification companies that offer or guarantee specific results because they don't know what the final terms will be.

•10.   What are my costs and can you put this in writing?

There are two ways loan modification companies charge.  They either charge a flat fee or a fee based on a sliding scale depending on the size of renegotiated payoff or by the size of your first payment.   If they are unwilling to spell out the terms to you up front, keep shopping.  Also, don't be afraid to shop around.  New loan modification companies are popping up everyday which means more competition and better pricing.  A loan modification fee should not exceed $2500 and include a forensic mortgage audit.

Tracy Miller
Canton, MS
S. S. Specialist

Steve, great post.  You provided a wealth of information.  I wasn't even aware that there were or are loan modification companies out there.  I work with distressed homeowners regularly and when they ask me about obtaining loan modifications, I instruct them to contact their current lender or I call myself for them to see if a loan modification is possible.  Before the current lending/credit crisis that we're seeing now in 2008, it was a lot harder to persuade lenders to approve loan modifications for delinquent homeowners, but today, it's been much easier.  When I call lenders now on behalf of homeowners, they're a lot more willing to agree to loan modifications.  So, I just wanted to add on the subject of loan modifications, that delinquent homeowners should always call their current lender first as opposed to calling one of these outside companies that you wrote about.

Again, great post and thanks for helping to keep us informed.

Oct 29, 2008 03:04 AM
Steve Dibert
MFI-Miami - Fort Lauderdale, FL

If you work with distressed homeowners call me because what I do could definitely benefit your clients.

Oct 31, 2008 02:58 PM
David Rottman
Self - Montecito, CA

  • Steve, you are the only one I can see that brings up the anti-capping laws, (item #5-soliciting business for attorneys) where lawyers are not allowed by law to have outside non-attorney's solicit business. Good job!   My question to you is, how then can a Loan Mod Company be legal, aside from a Law firm advertising they perform the service.   To do any volume, loan mod companies, or processors would have to bring the business in.   Therefore, I would say most LMC's are illegal.  For one, if they are violating foreclosure consultant laws which prohibits non attorneys contacting folks with NOD's and secondly,  for using the out side attorney, but acting as Cappers, or Runners.  Your thoughts on this are appreciated.  Thanks 

Dec 06, 2008 10:33 AM
Steve Dibert
MFI-Miami - Fort Lauderdale, FL

David,

In my opinion, many of the LMCs in California are operating illegally either from an anti-capping or DRE perspective. 

The other day, I was on the DRE website and noticed that only 28 companies doing loan modifications in California had their fee discosures approved by the DRE, yet, there are hundred of them operating.  Many are violating the anti-capping laws as well by acting as solicitation agents for attorneys.  This is not just a problem in California but in many other states.  The problem is that state regulators who enforce mortgage regulation do not have the legal authority to enforce the conduct of attorneys.  However even if they could they would have trouble enforcing it.  These regulatory agencies are overwhelmed and understaffed. 

Enforcement of the attorneys falls under the jurisdiction of the state bar associations.  I have noticed here in Florida that the Florida Bar has taken a very proactive approach with this by reminding attorneys about anti-capping laws and use of runners. 

The real problem with the loan modification industry is the "bandwagon" effect.  Everyone wants to loan modifications or foreclosure rescue.  From loan officers and mortgage brokers (who in my opinion 80% of whom whould have never been in the business) and attorneys who think they can make easy money because they believe it's just like writing loans.  I'm even seeing people trying to mimic what I do.  This is starting to create a real problem because most of the people who became mortgage brokers after 2001 were not trained to be true loan officers but were trained to be order be order-takers.  Most attorneys have little or no mortgage experience or understand how the industry works.

 

Dec 07, 2008 02:15 AM