In every scam, the victim must be desperate. They must “believe” they are going to miss out or possibly die without the product or service. It doesn’t matter what the product or service is although sex, money and death are big sellers.
The mortgage scam was no different. It brought the promise of the American Dream of Homeownership through no money down, interest only or option arm loans.
The loan modification scam is a continuation of mortgage scam. The victim is still desperate, but now they are desperate not to lose the “American Dream.” It is now the promise of a lower fixed monthly payment and a principal reduction.
Most modifications are scams because they do not reduce principal or payment amounts. Get the borrowers to start making “trial” payments and then repeatedly ask for documentation. These are really just “Hope” modifications. Nothing concrete, just the hope of something in the future like a Hail Mary pass with 30 seconds left in the game.
The lenders know that if the borrower keeps making “trial” payments and “updating” their paperwork, they will have one less property on their books, will have time to negotiate with their mortgage insurer, investor and in some instances investigate the borrowers to see if there has been any irregularities in the loan process. Few people get a meaningful modification. The best we have seen is the accrued interest write down by Wells Fargo Bank on the World Savings Pick-a-Payment loans. I am sure that there will be a few modifications with 40-50% write down of principal, but as an attorney who represented banks for 20 years, they are only going to do it if they made a mistake and are required to make the modification. They didn’t get rich by giving away money.
Most modification programs are scams because there is no up front approval or denial. The borrower submits documentation and begins trial payments not knowing if they will be approved or denied for many months or years. In the meantime, every month their credit score is being reduced because they are not paying “as agreed.” The fact is that property valuation and income/debt ratio analysis is a secret and is never disclosed. The borrower has no ability to determine why they have been denied for the modification. What should they do?
In order to reduce their anxiety, I ask them to work through a 3 step process to see if a modification makes sense.
Step 1- What are the terms of the modification? Is the modification just putting the late payments at the end or is there an interest rate or principal reduction?
Step 2- Can you pay off the balance? A good rule of thumb is that a borrower can payoff 2-2.5 times his gross household income in 30 years and go on vacation and have a child or two. Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000. If you determine that you are never going to “own” this property, is this the best use of your money?
Step 3- Is the modification payment less than I would pay in rent? Assuming, the above calculation shows that you will not pay off the balance, is the modification payment still less than rent?
Most loan modifications programs make no sense. There will be no principal or long term payment reduction. It is a temporary band-aid. If you are in a trial modification, I urge to consider whether this is in your best interest. The lenders have no problem doing what is in their best interest and you should not either.
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© 2010 Joan Grimes