Lessons in Loan Modifications

Suze Orman is growing on me. Sort of. She often has sage advice for consumers, and lately she has been making regular appearances on CNN’s Larry King Live. I cannot say I completely agree with everything she says, but lately, she has been telling it like it is and when it comes to financial news and advice, it’s refreshing to see some honestly on TV. I have her suggest to consumers that if they are having problems with their mortgage, they should contact their lender (i.e., the workout or the loss mitigation department). A client recently told me he did just that, after hearing Orman suggest it sometime last year. He was falling behind on his mortgage, and decided to walk into his local bank to talk to them. It did not go quite the way he planned.

At the time, the client was not residing in Massachusetts, and his lender was a local bank. He sat down with the manager and explained his situation. Instead of extending an accommodation, or working with the client to help him keep his home, the manager basically said this: “sorry, but we have a lot of loans going delinquent and we need to cut our losses, so we’re going to start the foreclosure process now.” And so they did. The bank pretty much put the house into an accelerated foreclosure process.

Yikes.

That’s lesson number one: don’t go telling your lender that you’re having problems paying your mortgage unless you have some reasonable expectation as to what the response will be.


Lessons Two & Three

Lesson number two: about a month ago, I heard Orman, along with a bunch of others on Larry King Live talking about the economy and consumer concerns. One caller (or it could have been an email) asked this question: if I am going to work with my lender on a mortgage modification, is this something I need an attorney for. All of them said no. Some of them suggested it was a waste of time and money. And some of them laughed.

Over the weekend, I attended the American Bankruptcy Institute’s Northeast Consumer Forum. On Friday morning, I was a panelist along with two colleagues and a local Bankruptcy Judge and among the topics discussed was loan modifications. I learned that some of my colleagues who represent lenders have been working with their clients to learn their modification process. So if the lender has an attorney working on the modification, why shouldn’t the borrower have an attorney? Since many of these borrowers did not have lawyers at the closing to begin with, wouldn’t it be prudent to have an attorney? Which brings me to lesson number three.

Another client worked directly with their lender to get a loan modification. And, after several months, they got one! It was an adjustable rate note, and according to the letter from the lender, they agreed to freeze the interest rate for 5 years. GREAT! Of course, if rates go down, that could be a bummer, but that was not among my chief concerns. My clients sent me the two page computer generated letter. It was not signed. It did not mention who authored the document. And more importantly, it had this language:

You are eligible to receive a sixty (60) month extension of your current interest rate on the subject loan, effective with your next interest change date as set forth in your loan documents (your note and security instrument). Because [the really nice lender] is waiving significant interest increases on your loan, this means that you will save hundred, probably thousands, of dollars over the life of your loan.

I did know what this meant. Is the rate frozen now, or is it frozen when it adjusts again? I asked my client “what does that mean?”

The response: “I don’t know.”

Yikes.

I would have not only demanded clarification, but I would have made sure that I documented the clarification. Perhaps better said: my idea of a loan modification is not a two page unsigned computer generated letter that only causes me confusion. So the third and final lesson is this: have a lawyer on hand. A good and reputable lender will have one working for them, and you should have one working for you. If they are not a good and reputable lender, then I cannot think of any reason NOT to have an attorney on your side. If you don’t have a lawyer, you might end up with a “modification” that sounds good, but might not be, if for no other reason than you simply don’t know what exactly they are modifying.

Sorry, Suze. I think you’re giving people bad advice on this issue…but you are otherwise growing on me.

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