Home loan modifications remain an enigma

Q:  Over the past several years, you’ve consistently been pretty negative about the ability of people to get a loan modification. I remember you even called it a “scam.”

Well, we’re now in a position to need a modification if we are going to be able to keep our house. I won’t go into the details, but we’ve done exactly what you have always preached against – we used our IRA to help augment our loan payments. Now the IRA is down to nothing and we don’t know what we’re going to do. So my question is, has anything changed? Is there more light in the tunnel for loan modifications than there was a few years ago?

A: Simply put, very little has changed on the loan modification front. However, I have seen some “weird” things recently that give me a glimmer of hope that a few, probably less than a handful, of homeowners are receiving some substantial help.

To recap for readers who haven’t kept up as well as you have: For the most part, mortgage modifications have been nonexistent.

Everyone has to clarify for themselves what they mean when they say “loan modification.”

Sure, if you need temporary help, such as a temporary rate reduction, or you need to put some missed payments on the back of the loan, banks can often accommodate you. But that’s generally true in good times and bad.

When most people they think about a needed loan modification, they’re thinking about reducing the balance of the loan to something closer to the market value of the property. Or perhaps they have a balloon payment coming due and they just want a 30-year fixed mortgage. Or even just a permanent rate reduction.

All of these are very, very rarely obtained.

The reasons are numerous and too extensive to go into here. But it has to do with the way home mortgages were done over the past decade. There are mechanical problems which make it all but impossible for your loan servicing bank to permanently change the terms of your loan.

It would be great if they’d just come out and say so. But the terms of the Troubled Asset Relief Program, bailout, so many years ago now, mean they have to keep up the charade.

But last week I did see a proposed modification that actually permanently reduces the balance of the loan. It’s part of a government program that I suspect is too small, has too many complicated qualification requirements and is simply underutilized by the banks. That has certainly been true of the last four federal programs.

But the fact that I’ve actually seen with my own two legally trained eyes the terms and conditions of this woman’s modification gives me some assurance that somebody is actually getting an honest-for-goodness loan modification.

Generally speaking though, we are in that same mindless loop where the banks, or independent contractors pretending to be the bank, take all of your paperwork for “processing.”

Then they lose your paperwork, so you resubmit it.

Then when you call back, nobody ever heard of “Bob,” who was the guy you spoke with last time.

Then after a few months they tell you “underwriting” rejected your request because you were current on your payments.

So you start missing payments.

Eventually you either get frustrated enough to research doing a short sale, or they foreclose.

I wish I could tell you there was an ever-increasing ray of hope out there. But I’ve yet to see it, at least not on a large scale.

Maybe time will tell if the banks are finally ready to fully utilize the available government programs.

In the meantime, I truly believe it’s important for homeowners in your position to exhaust their various options.

If you think that unloading your house is the best long-term solution for you and your family, then forget the loan modification and the resulting frustration.

But if you still really, really want to try the modification route I would encourage you to do so. Maybe you’ll get lucky and win the loan modification lottery.

If not, at least you’ll know you gave it your best shot. That, too, will be helpful in putting your mind to ease many years from now.

However, the one piece of advice I’d leave you with is to be very careful of any loan modification documents you sign.

Many of the documents I’ve reviewed this year purport to say one thing, but in fact say something very different in eight-point legalese type.

Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at SolanoScene@TJones-Law.com.