How does loan modification work?

By Joel Persinger
YourRealEstateDude.com

The problems in the housing and lending markets have caused the births of several new “industries” designed to help struggling homeowners address their financial woes. One such approach is called, “Loan Modification.” This is a process by which a negotiation is undertaken with the lender, usually by an attorney, for the purpose of renegotiating the terms of the loan. It should be clearly stated that the overwhelming majority of successful loan modifications DO NOT include a reduction in the amount of principle owed. The figures I have been quoted from a number of experts indicate that less that 2% of loan modifications include a principle reduction.

The loan terms are generally what are modified. For example: the lender may agree to reduce the interest rate, change the loan from an adjustable to a fixed rate of interest, lengthen the overall life of the loan (from 15 years to 30 years, for example), wave any late fees, tack the amount of late payments owed onto the end of the loan and so on. But, the one thing the lenders are least likely to do is reduce the total amount of principle you owe.

I’ve mentioned the principle reduction a couple of times because this is precisely what scam artists promise. The crooks understand that distressed homeowners are looking for a way to owe less on their homes. So, they promise to get the lenders to reduce the principle in order to entice the homeowners into the scam. As I was writing this column, I received a call from a homeowner who had been referred to me for a loan modification. She was shocked when I told her the truth about principle reduction. “I just spoke to some guy who told me he could get my loan amount down by half,” she said. “He told me to write him a check and he would get it done, guarantied,” she told me. After she had calmed down, she expressed her utter amazement that people take advantage of struggling families in that way. Unfortunately, I was not amazed.

On November 3rd, the California Attorney General announced the arrests of three members of a fraud ring who preyed on desperate Southern California homeowners by falsely promising to renegotiate their home loans. Instead these scam artists ripped them off for thousands of dollars while their homes fell into foreclosure. Among the other things these folks are accused of, is telling their victims that their mortgage loans had been renegotiated when they had not been. They told the homeowner that the lenders needed a “good faith” payment to secure the new accounts. Homeowners made payments to accounts under business names such as “Reinstatement Department” or “Resolution Department” that made it appear as if the payment had been applied toward the loan. According to the California Association of Realtors who reported the story, Bank records indicate that more than $700,000 was stolen from homeowners who fell victim to this scheme.

Loan modification can be a wonderful opportunity and it should be explored by struggling homeowners who wish to remain in their homes and avoid a short sale or foreclosure. Still, it is important to do your homework. There are some wolves in sheep’s clothing out there and the last thing I want you to be is their victim.