Tuesday, July 27, 2010

Warning: Trial Loan Modifications can be Hazardous

The failure of the government's loan modification program, Home Affordable, has made a lot of news lately. Only a fraction of the anticipated number of homeowners have truly benefited from the program. Why do so many people start the mortgage modification process and end up getting denied or canceled? What are the hazards of getting involved in a trial modification?

Trial Modifications
About a year ago, under tremendous pressure from the government and consumer groups, home loan servicers (primarily the big banks) started using trial modifications in order to get more homeowners started in the loan modification process. Because of the mammoth volume of requests for modifications (Bank of America was receiving over 80,000 calls a day at the peak) servicers started homeowners on trial modifications, or temporary modifications, while they began processing and underwriting the homeowners qualifications for a permanent modification.

Often times the processing time to determine if a homeowner takes many months, up to a year. Meanwhile the homeowner continues to make trial modification payments at an amount lower than the payment on their mortgage note. The homeowner assumes if they make their trial payment on time, they will be approved for the permanent modification. They don't realize that homeowners are often denied a permanent modification regardless if they make all of their trial payments on time. Most of the time the reasons for denying a modification relate to the borrower making too much, or too little income.

Something has been happening as they have been making those lower, trial payments. The homeowner has been accumulating a past due balance for the difference between the note payment and the trial payment. The longer the trial period, the bigger that past due balance becomes.

Putting Homeowners in a Hole
Take the example of Stacey. She started a trial modification with Wells Fargo in August of 2009. She was told it would be a three month trial. She made all three months on time, but Wells Fargo was behind, presumably dealing with hundreds of thousands of other homeowners. So Stacey continued to make the trial payments as directed by Wells Fargo. Finally in July of 2010 she received notice that her modification request was declined because she didn't make enough money. We'll ignore the point at this time that Wells Fargo did not calculate her income correctly. So they sent her a letter letting her know she has to start making her note payment again. They also mentioned in the letter that Stacey had to immediately pay the past due balance of over $8,000. "Past due? But I made all of my payments on time," Stacey thought. Yes, but now she owes the difference between the trial modification payments and her note payments over the past 11 months. And she owes it now. According to the letter she must pay it now or face foreclosure.

Be Careful with Trial Modifications
The servicers need to be aware of the hole they are putting homeowners in when they start them on a trial modification. Likewise, homeowners that are on trial modifications need to take advantage of the lower payment and save some money each month so that if their request for modification is denied, they can pay the past due balance.

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