Real Estate News
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Creating A Successful Loan Modification Process for all Parties
[Note: To follow is an excerpt of a radio show interview conducted by Peter L. Mosca, host of Income Property Investment Talk dot com, with Bob Diamond, a practicing real estate attorney, real estate developer, and published author of three books on foreclosure investing. Bob eliminates the guess work in hiring a loan modification provider, reduces the frustration and confusion with the process, and details what is necessary for success in working with lenders. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/111809.] Mosca: What is a loan modification? Diamond: Loan modification is changing the terms of loans to make it more affordable, on a monthly basis, and also to get it out of default if your loan is in default. One thing that surprises everybody is that you can actually modify a loan that’s not yet in default, if you’re able to show that you’re in trouble financially and that your credit card balances are increasing and your cash available is decreasing month after month. The things that you change in loans to make it more affordable are, of course, the terms that actually affect the payment. The payment of loans are affected by just a couple of things: the principle balance, the interest rate, the repayment term, and whether it’s an interest-only or a fully advertising loan. Those four factors are really the only things that affect what your monthly payment is. The bank may do a principle reduction and there are a couple of keys that we can talk about there as to when that will happen. They can reduce the interest rate, which is very common. Interest rates sometimes go down as low as 1%. They can also stretch out the term. It’s very common to change a 30-year mortgage into a 40 or even 50-year mortgage. If you do those things, either singly or in combination, you can lower the payment significantly, and if you’re far behind in your payment, like say someone gets seven or eight months behind, which is very hard for someone to catch up on all at once. If someone is in the position then the lender can tax the payments on the end, or they can fold the payments back into the mortgage and you pay a little bit each month towards them. Mosca: You spoke about reducing the rate; you talked about stretching the term. What was the first thing you said? Diamond: It’s everybody’s favorite, the Holy Grail: reducing principle. Mosca: What types of hardships qualify for this type of help? Diamond: A hardship letter is an explanation as for why you’re in trouble… why you’re unable to make your mortgage payment. The key to a hardship letter is that it explains in a simple, straightforward way, what the financial problem is. It can be absolutely 100% true, but you need to stick to the financial facts. You want to keep the explanation short because everyone has a short attention span these days, and if your hardship letter stretches to over two pages, they’re probably not going to read it. I spoke to one loss mitigation officer at a major lender and they told me they had 1500 files. One person was responsible for 1500 loan modification request files. So, if you imagine someone sitting there with way more files than they could possibly handle, you want to make their life easy. The hardship letter should be short. It should do exactly what you said, but it should have something personal in there. For example, “I really want to keep my house. I want to provide a home for my family, so even though I may be upside-down, I’m still going to pay for it as long as you guys can work with me to make an affordable payment.” Mosca: Does make sense to the lending institution to work something out with these folks? I mean, in the long run, it’s better for them? Diamond: Definitely. The statistics from the Federal Reserve when they did a study of it and the Mortgage Banker Association did another similar study, the statistics suggested that they recover between 65 and 67% of the original loan balance when they foreclose, on average. Given that most borrowers, if they’re given a chance to have an affordable payment, and not necessarily a principle reduction, but just a payment they can afford, most people will stay in their houses. There are some economists that will say differently, but that’s because they don’t know what they’re talking about. People stay in a home because it is their home. As long as they can afford the payment, they’ll usually stay. All that people are looking for is an affordable payment, and for the bank it usually makes sense. Mosca: Everyone can come out to be the winner? Diamond: Nobody is getting everything they want. It’s all sort of good negotiations. Everybody is happy to leave something on the table for the other guy in order to make it go through. The bank gives you a break on the interest rate, maybe cuts the principle sum, but gets you paying, maybe more than they would get if they had to foreclose. The homeowner gets an affordable payment, maybe a little uncomfortable, but it’s still affordable, and everybody wins. So I agree with your assessment, 100%. Mosca: There was an article in Realty Times at realtytimes.com recently that talked about how the California attorney-general, the Department of Real Estate, the FBI, the California Bar, and even the California legislature are looking into more than 2100 companies suspected of defrauding troubled homeowners. According to the California State Bar’s Chief Trial Council, Russell Winer was quoted in this article, he says “‘In my 21 years in attorney discipline, I have not seen a crisis of this magnitude. It is truly unprecedented.’” What is happening out there? Diamond: It’s interesting. The government has a view that companies went into business, took people’s money, and then didn’t do the loan modifications. I can tell you, they’re 180 degrees off. What actually happened is something completely different. People were charging typically $1,500 if you are not an attorney to do the work. The problem is that the banks make it so difficult to get a loan modification as far as time consumption that they made it, as a business, impossible to do for that amount of money. So what typically happened was that the providers would go out and advertise in markets, very quickly get a couple hundred cases queued up, and then find out that they weren’t able to get the cases through. Then they would make the mistake of marketing more, bringing more money in, so they could handle the cases that they had, hoping they would get more efficient, and in the end they run out of money, they can’t pay their staff, and then they’re sitting with hundreds of cases they can’t do. If the Attorney General and the legislature ever wanted to look at responsible party, they should look on the other end of the phone, which is the bank. The banks will do things like lose your faxes three, four, and five times. You’ll fax them a fifty-page fax with all the documents they request for loan modification, and then they’ll say, “Oh, we lost it. Sorry, could you resend it?” The problem is that they get evaluated on how quickly they turn around these loan modification requests, they get evaluated by the Treasury, and the banking regulators, and every time you send in the fax again, it restarts the clock. What they do is they play the “We lost the fax” scene. “Yeah, we’re sorry, but we lost your fifty-page fax again and we don’t have anything that we are processing for you. They’re playing games with people. Mosca: What should people do to win the game? Diamond: Here’s the secret: First, understand what’s going to happen, that you’re going to be faxing in three or four times. That’s number one; just understand that it’s not personal to you, but it’s going to happen. The second is to understand that if you’re diligent and keep after them, then you will get your loan modification evaluated and most likely you’ll get it through. But understand it’s not something where you can be passive. You’ve got to be calling them at least once a week to follow up, and each time that you send papers in, you need to call them the next day and make sure they received them and they have them logged in their system. Here’s a brand-new thing that we just found out: Bank of America is no longer accepting fax submissions, but they don’t tell you that. Their fax machine still works, you can still send faxes in, but they’ll never show up on their system. They’re only accepting email submissions now, This is the kind of nonsense we deal with. So what the legislature in California did was blame these loan modifications, what they call scammers, and they made a law that to me was smashing flies with hammers. They made a law that you can’t pay any loan modification companies up front until they’ve completed all the work they’ve promised to do, and that includes attorneys that do loan modifications. The problem with that is that you’re not going to find anybody to do the work. Mosca: Sometimes when government tries to help, and they don’t reach out to the pros that know the ‘ins and outs’ like you do, they come up with legislation that’s counter to what they’re even trying to accomplish. We have a caller on the line. Her name is Christy from California. Christy [caller]: I have two questions. One, we have two residential apartment buildings out-of-state, and we’re cash flowing at this point, meaning we’re covering the mortgage but we’re not profitable. We’re not in a necessarily desperate situation, but we are at a point where if there’sPages: [1] 2