Lenders continue to jerk people around when it comes to giving you a loan modification, not a surprise to me or anyone "in the know."
But what is a surprise is how everyone continues to play along and follow the leader to the edge of the cliff and beyond. People just do not get it. Here is my take on what is happening right now:
I am not sure at the moment how many foreclosures are in the works for the next couple of years. Depending on whom you talk to, it could be 1-3 million homes. That's a lot of homes! So here, in my opinion, is the plan that lenders are following or will follow....
If lenders were to foreclose on and place the massive amounts of properties on the market in a short period of time, it will no doubt hurt property values and hurt their bottom line as most of these homes are underwater and the losses would be in the billions. So instead, they are probably going to be foreclosing on say 50,000 or so per month until the entire inventory is depleted which could take 2-3 years or more.
In the meantime, they offer consumers trial modifications getting consumers all excited because they are getting a trial payment of probably half of what they were paying and consumers think that ultimately that is what their payment will be because it actually is what it should be based on the Making Home Affordable guidelines. However, every month that you make the trial payment, your credit gets hurt and you are 30 days late. Why? Because if you have for example a note that says that you have to pay $4,000 per month but you are paying $1,500 or so per month, you are not making your payment that you agreed to when you signed your note. Even if you make a payment of $3,900, you are still not making your required payment and you will be reported late.
Seems unfair, doesn't it? I mean, this is what lenders are telling you to pay and you are doing exactly what they are asking you to do. Exactly.... But it gets better.
After several months (3-6) of you paying the trial payment, you receive a Notice of Default, or an NOD, which is the beginning of the foreclosure process which basically gives you 90 days to come up with all the payments that you are behind along with fees or else they will sell your home 22-30 days after the 90 day period expires.
So you call the lender and ask them why you received an NOD when you have been making your trial payments on time and they tell you not to worry, just keep making your payments and that it is just part of the process. And once again, they are telling the truth, it is part of the process, more on that later.
When you get a Notice of Trustee Sale (NOT), you panic because an NOT states that they now have scheduled your home to be sold in a Trustee Sale which is 22-30 days away usually. So again, you call the lender and ask them what is going on and they tell you once again that it is just part of the process, and just keep your chin up and keep making your payments.
So guess what? A few days before that Trustee Sale date they let you know that you did not qualify for your loan modification and that they will indeed be selling your home and by then it is probably too late to do anything. And the worst part is you now need to find a home in 30 days.
Why and how is this happening?
It is happening for several reasons, greed by the lender and stupidity by Government for letting lenders get away with this garbage.
The lenders are being greedy because let's face it, they really do not want to give you a loan modification because they think that you are going to default again anyway, so why go through all that work just to have them spinning their wheels when most of the people who received loan modifications go back into default. I can't say I blame them in this instance. But why not just let people know that they do not want to give them a loan modification?
Because if they are honest and do let people know that they really do not want to grant them a loan modification, the following will happen:
- Most consumers will not pay lenders the monthly trial payment, much less the normal payment and in keeping homeowners thinking that they will get a loan modification, they will get half a payment which is better than nothing. We are talking about millions if not billions of dollars per month that they are receiving in trial mod payments.
- Most consumers, thinking that they will keep their home, will not abandon them and will keep them in decent shape up until the end. Millions, if not billions of dollars are spent by lenders trying to get the properties back in shape to sell and this alone will save them from having to make these expenses.
- The time period it takes to begin and complete foreclosure proceedings takes place because although consumers are making payments, it is not the actual payment and through the trial payments, consumers are actually moving the foreclosure process along each month that they make the trial mod payment. Think I am crazy? Lenders have already told us that they can foreclose any time on clients that have made trial mod payments. No kidding.
So in reality, for most people, trial mods are nothing more than a glamorized month to month rental agreement and these poor families are like cattle following each other to the slaughter house not knowing whats in front of them. They just keep going along with the plan until it becomes their turn to be slaughtered. In real estate terms, lenders will give you a trial mod payment which they will ask you for months to keep making probably knowing that they do not have any intention of giving you a loan modification and when it becomes your turn to be in that 50,000 homes they want to foreclose on that month, you "suddenly" get denied and your home gets sold. It could be 3 months into the process or 18 months, when its your turn, its your turn.
If you think that I am crazy, I should tell you that I had a conversation with someone who happens to work for one of the Big 3 lenders who shall remain nameless and I gave them my theory and asked this person what they thought about it. Want to know what this individual said? "That's probably not too far from the truth and I can't dispute that".
Look, I hope and pray that I am crazy, I hope and pray that I am being delusional and paranoid for everyone's sake. Only time will tell.
What is the solution? Recently Fannie Mae announced that those who walked away from their homes in a "strategic" default may not be eligible to buy another home using a Fannie Mae loan. Meaning, if you qualify for a loan modification and do not make an effort to get one you could be locked out of the housing market by certain lenders for years to come. Also, if you make a decent amount of money and just want to walk away, you could also be subjected to this penalty.
But not all loans are Fannie Mae backed loans. Thinking that you will just not be able to buy for 7 years if you walk away from your home is just not the case, there are and always will be many options in regards to financing when buying a home. Forcing a consumer to allow themselves to be jerked around for months, sometimes years by a lender only to be put in a ridiculous loan modification of 2-3 years on a loan is just wrong, especially if the home is worth a lot less than what is owed. In 2-3 years the consumer will be back at square one. Plus, and this is a big plus, if the original note was a non-recourse loan, a new loan modification wipes out the non-recourse benefit of not having to pay back the lender should you have to do a short sale down the road. Read my article, "The Dangers of Loan Mods and Short Sales" at the end of this story.
What is Government and Fannie Mae thinking in allowing this? I have some thoughts, but will reserve them for a later date.
I am not trying to stop you from attempting a loan modification, by all means do so. Just know the game and detach yourself emotionally from the process. Be prepared so that you know and understand your lender's next step and don't get caught off guard. Sometimes walking away is the best solution, sometimes its not. Walking away just to walk away is not smart. Understand the consequences and know your options.
Next time you see a commercial by one of the large mortgage lenders showing how much they care, they do! But only about themselves. They have a plan and it does include you, unfortunately most people will follow their plan and be like cattle on the way to the slaughterhouse.
I know that this story may not be a popular one in terms of the content, but I have to report it as I see it. I am just the messenger and I refuse to be the cow walking foolishly towards the slaughterhouse.
***For more in depth information on loan modifications and short sales, read my article "The Dangers of Loan mods and Short Sales"
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