This weekend on the radio, there was an interesting conversation among a handful of financial and mortgage experts about the banking industry’s current fascination with loan modification programs. The participants in the discussion came up with some very good points about the modifications that lenders are currently offering to homeowners in foreclosure trying to lower their monthly bills and how banks use attorneys to pursue foreclosure but do not want to deal with a homeowner’s legal representation.
First of all, the mortgage companies are beginning to get into the loan modification game because of simple survival concerns. On a mortgage with a high interest rate, they may initiate negotiations with borrowers to lower the rate from, for example, 8% to 5%. Most borrowers who are behind in payments and facing a financial crisis may view this as an exceedingly good deal and not hesitate to take it.
However, the banks’ enthusiasm to begin modifying some mortgages is based only on short-term survival concerns. Lowering the rate by only a couple of percentage points is just not helping many homeowners. Within six months of a loan modification, property owners are falling behind again and may even end up right back in foreclosure.
This gives the banking industry all the ammunition it needs when it goes before the United States Congress, states it has been attempting to help homeowners, the modifications are just not working as borrowers fall behind again, and it would be great if the Congress could just give the banks a few billion dollars more to help them through the economic recession.
The lawyers in Congress, of course, acquiesce to the banks’ demands, hand them over several billion more dollars of money taken from taxpayers — the very people the banks are supposed to be modifying loans for — and send the lenders back to the foreclosure drawing board. The lenders, in turn, go right back to offering bad modifications and then sending their attorneys in once the homeowners redefault.
This is one more reason why banks love their own purchased lawyers but simply hate dealing with a lawyer who has the morals and ethics to help borrowers in financial distress. Some banks are now even recommending that borrowers do not get legal representation when attempting to work out an alternative to foreclosure.
Banks are pushing this line on homeowners for the same reason they originally supported subrpime, stated income, and no documentation loans — it works out for the banks over the long term but hurts borrowers. Originally, the foreclosure process used to have just a couple of steps:
1. Homeowners fall behind on payments.
2. Foreclosure process begins.
Now, bowing to political pressure, banks have added another step, although the destination is the same:
1. Homeowners fall behind on payments.
2. Banks offer inappropriate mortgage modification.
3. Homeowners fall behind on modification.
4. Foreclosure process begins.
By offering the poor loan modification solution to borrowers, banks can claim political cover later on when the plan fails. Homeowners are not aware of their rights during foreclosure, so therefore fall for the bank’s offer of a reduced interest rate, even though they know they will not be able to make the payments for the long term.
The lenders have always counted on the inability of borrowers to understand the complicated loan documents they sign to purchase their home. Banks themselves do not understand the documents, but they know that they can print enough money out of thin air to purchase lawyers and whole court systems that will interpret the loan paperwork in favor of the mortgage companies.
In conclusion, banks are beginning to offer loan modifications they know will later default for two primary reasons. First, it gives them political cover when they ask for more bailouts from Congress later on. And two, offering a modification preempts the homeowners’ search for a company or attorney who can help them negotiate a much better deal or determine what lending laws the bank has violated. But this preemption almost always ends up as a beneficial solution for banks and a horrible one for borrowers.
Nick publishes articles on the ForeclosureFish website, which aims to educate borrowers how they can prevent on their homes while they still have time. The site describes various methods to hold onto a house, including foreclosure refinancing, cash for keys, mortgage modification, filing bankruptcy, and more. Visit the site today to read more and find out what alternatives you can use to prevent the loss of your home: www.foreclosurefish.com/
