Type the phrase “loan modification” into Google and you’ll get nearly 3 million results. Links with slogans like “Find government help to stop foreclosure,” and “Stop mortgage foreclosure,” pop right out at you—a slew of these sites you click on portend to offer “free” advice, but they are designed to get your business and get you to sign on the dotted line.
And there are a lot of ifs tied to these seeming olive branches from would-be lenders eager to bail you out of a top-heavy home payment that’s threatening to force you into foreclosure.
Well, anything’s better than foreclosure, right? Wrong. There’s a bit more to the story, and there are some underlying problems with loan modifications that troubled homeowners need to keep an eye on.
Along with the sites offering to help you modify your loan, the “loan modification” search yields a host of sponsored links, the lion’s share of which are from attorneys—many also offering to help you modify your loan. True, they’re just some more folks who want your money and want you to sign on the dotted line, but this is one time where it might pay to click on the sponsored links. If you are going to modify your loan “consult an attorney,” advises Jeremy Colonna, a broker withy Colonna & Co. Realty, which operates out of an office on Second Street in Belmont Shore.
Colonna, who does a lot of work for Chase Bank as well as other banks, has a front row view of what’s happening to homeowners in trouble. “I have sold a home for a bank where a woman did a modification, and now it looks like she will have the bank go after her for everything,” Colonna says.
If the woman lived in another state, such a dire scenario, where the lender is going after the homeowner for their losses on the home, might not sound so odd. But it’s an eye-opening scenario in California, which is a non-recourse state. Basically, California code CCP 580b prohibits what’s known as a deficiency judgment against homeowners being foreclosed upon. In essence, you can fail to make your mortgage payments, get foreclosed upon, and walk away unfettered—that’s not to say your credit won’t be damaged, and you won’t lose the equity in your home. That is because state law prohibits the lender from going after your assets, like your kid’s college savings or your rare stamp collection.
It’s worth considering before you modify your loan: depending on the wording in the contract, it can be legally argued that the loan modification is not purchase money financing (money used in the purchase of the home), and therefore you are no longer protected by the state’s non-recourse code.
If you only default and have not modified your loan, “the buck stops at the foreclosure,” Colonna says. But if you do a modification, and something bad happens—you lose your job, or have a medical issue and the bills pile up—and you default, the lender may be in the position to not only take your home, but they can go after you in court for the rest of your assets.
And while there are plenty of loan modification companies hungry for your business, there are plenty of people in the business of lending or arranging loans who are wary of what’s happening in the industry today. “We don’t do anything with loan modifications, thankfully very few of our clients need them as we predominately fund 30-year mortgages,” says Dennis Smith, a broker with Stratis Financial in Huntington Beach. He adds, “Though I am inundated with calls from loan mod companies looking for clients—the same people that were brokers and threw people in the Option ARMs for homes they couldn’t afford. From my interaction with the sales guys/gals calling me, they just found a new source to satisfy their greed to make a buck off people without much concern for the result as long as they get it in the bank.”
However, Smith, who is quick to defend most brokers in his industry as professionals who stuck to a code of ethics and did not put people into homes they couldn’t afford, believes that due to political pressure, lenders would be hard-pressed to pull the trigger on a recourse loan. “It is my feeling that no bank/lender would dare to go after any assets after agreeing to modifying a loan,” he asserts.
Colonna agrees about political pressure possibly keeping any lenders from pulling a trigger on a recourse loan, but his biggest concern echoes Smith’s main beef: many of those in the business who are arranging the modifications are some of the same people who earned their living by getting as many people into homes as they could without regard to whether those people could actually afford to be buyers.
“The biggest concern: many of the people who are doing loan mods are the same people who were doing these toxic loans in the first place,” Colonna says, adding, “Frankly, it can help some people. And it’s not necessarily that the lenders would go after you personally, but they can.”
Mark Prather, president of ERA Buy America Real Estate Services in La Palma and also president of Quest Funding Inc., a company that raises investor capital to make hard-money loans, actually predicted the housing market crisis and the plague of foreclosures when I interviewed him for an article in April 2004 when I was writing my column for the Long Beach Press-Telegram. At the time, Prather, then president of Mark1 Mortgage in Cerritos, warned that the massive amount of subprime lending taking place was leading the market into a bad place.
“I just frankly think there’s going to be a lot of foreclosures coming up in the next two or three years,” I quoted Prather as saying. Prather’s comments, and the headline “LENDER PREDICTS DISASTER AS INTEREST RATES GO UP,” drew hostile calls and e-mails from lenders and Realtors who labeled me and Prather fear mongers. To be sure, the headline, which I DID NOT write, was a bit dramatic. But that caution, it now seems, was in order.
“I was trying to discourage (many of the subprime loans) because the loans were terrible for buyers from the get go,” Prather says of his comments five years ago, far ahead of even the earliest warnings from just about any of the industry experts who finally took notice of the pressure cooking waiting to pop. “No. 1: They were putting consumers in a predicament that was sure to fail. No. 2: They put the whole economy at risk. It was the most egregious example to greed that I’ve seen in my lifetime.”
And today, Prather’s prediction is that the loan modifications, by and large, are not going to help most troubled homeowners. “The loan modifications, in my experience in most cases, are really not beneficial to the consumer,” he says.
One problem is that most of the loan modifications being done are by lenders who are not willing to discount the principle balance, but instead the interest payments, and they are simply taking the payments in arrears and attempting to lower the homeowner’s payments. “If you have a house that is worth $350,000 and you paid $500,000, there’s no way to help someone like that.,” Prather says. “And 90% of the people out there who are in trouble are in that boat. A loan mod is not really that beneficial to them.”
(I tried to reach the Mortgage Bankers Association for comment on this subject, but so far my requests for an interview have yet to be granted. Stay tuned for a possible rebuttal from the MBA. I’d also like to invite any expert who has something positive to say about loan modifications—and there are obviously many positives to modifying your loan—to e-mail me and possibly I can arrange an interview for an upcoming story on this subject.)
Colonna, who emphasizes that anyone homeowner in danger of defaulting should assess their individual situation and consult an attorney if possible, says that if nothing else, people should be aware that loan modifications may not be the olive branch they appear to be. “Loan mods can put you in a place were you eliminate a lot of your choices.”