Friday, October 9, 2009

Bankruptcy Attorneys Battling Loan Modification Lawyers

For some time now, bankruptcy attorneys and loan modification lawyers have been battling over the same turf. The bankruptcy attorneys believe a chapter 13 bankruptcy is the best way to help homeowners suffering with foreclosure. On the other hand, loan modification lawyers believe bankruptcy is the last option and loan modification attempts should be made first.

The problem with loan modifications, says the bankruptcy attorneys, is that that the modification process is long, time-consuming, and uncertain. The lender is under no obligation to approve a loan modification. Plus, some lenders seem to benefit by intentionally dragging their feet "reviewing" a loan modification while at the same time following an aggressive strategy of foreclosure through the state foreclosure courts. The homeowners think everything is okay because the lender has accepted the loan modification application; many of these homeowners don't realize that the lenders are typically also simultaneously trying to foreclose on the homeowner’s ownership rights in court.

Reporter Peter Goodman of the New York Times has written an interesting article about loan modifications. Below is his article:

Treasury Hails Milestone in Home Loan Modifications


For months, troubled homeowners seeking to lower their mortgage payments under a federal plan have complained about bureaucratic bungling, ceaseless frustration and confusion. On Thursday, the Obama administration declared that the $75 billion program is finally providing broad relief after it pressured mortgage companies to move faster to modify more loans.

Five hundred thousand troubled homeowners have had their loan payments lowered on a trial basis under the Making Home Affordable Program, said Treasury Secretary Timothy F. Geithner in a morning telephone briefing with reporters. Mortgage payments are now being lowered faster than homes are being sold in foreclosure proceedings, he added, and roughly 40 percent of the 1.2 million homeowners deemed eligible have been helped.

“That’s an important shift,” Mr. Geithner said. “Half a million families are participating in loan modifications that are substantially decreasing their housing costs.”

But economists said the program was still not big enough to prevent many millions of Americans from losing their homes before the books are closed on the Great Recession and its painful aftermath.

“It’s a help on the margin,” said Mark Zandi, chief economist at Moody’s “But it’s not going to end the foreclosure crisis.”

By Mr. Zandi’s reckoning, from this year to next, more than four million households will surrender homes to foreclosure or through so-called short sales, where the property is sold for less than the bank is owed.

The half-million mortgages that have been adjusted to create lower payments for borrowers have been modified only on a trial basis.

After three months of successfully making new payments — no sure thing — borrowers must then submit additional paperwork to turn the trial terms into a permanent modification, creating more room for bureaucratic stumbles.

Administration officials shed no light on what experts say is a crucial determinant of the ultimate success of the program: They said they did not know how many of the mortgage modifications had actually lowered the loan principal, as opposed to merely stretching out the life of the loan through lower payments.

Experts say homeowners whose principal balances are reduced are much less likely to fall back into delinquency. Reducing the principal is particularly important for those who are underwater, meaning they owe more than their home is worth.

“When people are underwater, they have a much higher re-default rate,” said Diane Thompson, a lawyer for the National Consumer Law Center. “If some subsequent life event happens, if there’s a storm and they need money for repairs, if they lose their job, or they have to move and they need to sell the house, they are absolutely stuck.”

Even as the Obama administration reports progress, many homeowners continue to express deep frustration with the program.

In Hampton, Ga., Maxine Yancy and Michael A. Blaino say they were already approved for a loan modification from their mortgage company, GMAC, only to be informed that their agreement was mysteriously canceled, with the lender still threatening to foreclose on their home.

Far from the free-spending, exuberant borrowers commonly associated with the foreclosure crisis, Ms. Yancy and Mr. Blaino, her son, typify the fastest-growing source of trouble: Those who have fallen into danger because of a lost job.

Ms. Yancy, 73, is a retired schoolteacher whose income is about $2,200 a month — roughly half from Social Security, the rest from a part-time job teaching at a community college. She and her son together bought a three-bedroom ranch six years ago, paying just under $123,000. They have a 30-year fixed-rate mortgage at an interest rate of a little more than 8 percent, requiring payments of $1,089 a month.

The payments were manageable until June 2008, when Mr. Blaino lost his job in the reservations office of a local hotel. When the mother and son heard about the Obama administration’s plan for loan modifications in February, they contacted their lender right away.

When they sent in the paperwork, they were twice told that their file was incomplete. After sending in their paperwork a third time, GMAC responded with a “temporary workout plan” and invited them to pay $785 for the next three months.

Ms. Yancy says she promptly mailed in a check only to have it returned with a letter saying they were delinquent. When she called customer service for an explanation, GMAC explained that a certified check was required, though this condition had not been disclosed.

She sent in a money order for her July payment, then more for August and September. But when Ms. Yancy called GMAC last month to see about the status of their application for a permanent loan modification, she was told that the workout plan had been canceled and their house would soon be sold in foreclosure, she recalled.

Horrified and confused, she pressed for an explanation, and was told that they had failed to pay the agreed-upon lower payment of $1,088.

“That totally doesn’t make sense, because that was our original loan payment,” Ms. Yancy said. “It’s crazy.”

In the last two weeks, she and her son say they have left repeated messages with GMAC seeking a supervisor who can get to the bottom of the matter. “This morning I woke up with hard pain in my chest right where my heart is,” Ms. Yancy said. “I know that this is probably from the stress of dealing with GMAC.”

A GMAC spokeswoman declined to discuss the case, citing its privacy policy, but said generally that the lender has been eagerly processing loan modifications. The office that handles loan modifications has expanded its staff by 30 percent since January, and servicing teams have been working extra hours and on weekends, she said.

According to a report released by Treasury on Thursday, GMAC had modified 26 percent of eligible loans that were at least two months’ delinquent in September, making it one of the better performers. Bank of America, by contrast, had modified only 11 percent of such loans, according to the report.

Some mortgage companies tell customers they cannot modify loans because they merely send out the monthly bills, while the mortgages are actually owned by investors. Yet industry insiders say many mortgage companies can profit by delaying the process and keeping homeowners in long-term delinquency, extracting myriad fees.

Administration officials said they would continue to press mortgage companies for improvements in their handling of applications. On Thursday afternoon, Treasury and the Department of Housing and Urban Development summoned representatives from major mortgage companies to Washington for further discussions.

“We’ve put significant pressure on the servicers to ramp up production,” said Shaun Donovan, secretary of the Department of Housing and Urban Development, in Thursday’s briefing. “We are keeping that pressure on.”

Treasury first announced its foreclosure relief program in February. Under the plan, the government pays mortgage companies $1,000 for each loan they modify, and $1,000 a year for up to three years. The plan was advanced with the promise that it would eventually spare up to four million households from foreclosure. At the end of June, only 143,000 trial modifications had been begun, the Treasury Department now estimates.

In July, frustrated by the slow pace and irritated by homeowner complaints, the Treasury Department summoned major mortgage companies to Washington for what was subsequently described by officials as a dressing down. The mortgage companies promised to improve their staffing and training. The administration soon set a target of 500,000 trial loan modifications by the end of this month, reaching that goal three weeks early.

Still, officials said much work remained. “Unacceptably large numbers of families across the country are still at risk of losing homes,” said Mr. Geithner.

Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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