Kentucky Bankruptcy Law

Counsel with Care

The Dark Side of Home Loan Modifications

I have heard from one colleague that home loan modifications do occur and I have seen a successful one, but I have heard from far more people, clients, the crazy hoops they had to jump through only to be turned down time and again. When I ask if someone has attempted a home loan modification, the answer begins playing in my mind before they ever open their mouths:

“I submitted paper work back at such and such time and waited only to call back and they could not locate my documents. This happened a couple more times. I finally received confirmation that they received my documents, but they want updated ones. They told me not to make a payment and so I haven’t made one in several months, and they said that I should have an answer here in the next 20 days. But, then I got this letter from an attorney saying they are representing Big Bank and are going to institute a foreclosure action. I called back to the modification folks to see if I could start making payments to stop the foreclosure, but they said they could not accept payments at this time.”

Give or take a few minor deviations from the above script, I have correctly anticipated the response of my client every time. Worse than this is the rude awakening my client, now the Debtor, receives after I file their Chapter 13 as their last-ditch chance to save their home. The claim invariably lists a few thousand dollars in delinquency fees and “inspection fees”. The Debtor is shocked because they were repeatedly told not to worry and not to make a payment until they got an answer on the modification. They justifiably relied on these assurances and expected that no penalties were accruing during this period of negotiating the modification. Sadly, I then ask if they have anything in writing, email, or otherwise from the Big Bank folks saying they were suspending fees they are contractually entitled to during the modification application process. Again, I correctly anticipate the answer to be simply, “No, they just kept assuring me on the phone.”

Sometimes the arrears (past due amounts) on the home loan simply are too high to make a feasible Chapter 13 plan which includes saving the house. This is because the Debtors relied on the good faith of the Big Bank in negotiating the modification and went too long without making a payment. The entire arrears must be paid in full during the three to five years of the plan. If the amount exceeds what their budget can handle, then keeping the house is no longer feasible and they have to surrender it in the Chapter 13 and possibly convert to a Chapter 7. The good faith of the Big Bank assumed to be there by Debtor was a mere figment, a glimpse of an illusion, because the underlying home loan contract was never modified in writing. Hopefully, a class action lawsuit with claims of promissory estoppel and other such legal doctrines based on the Debtors’ justifiable reliance on oral promises will bring about reform, but the Big Bank will not do so voluntarily. The promise by Big Banks of doing these modifications appears to have been mere political puffery.

None of this makes sense economically for the Big Bank or for our nation. Big Bank is simply inflating arrears making it ever more unlikely that the Debtors can cure the default on their loan and bringing about more foreclosures. This results in more houses sitting empty on streets and on bank ledgers thus continuing to erode home values. It makes no sense whatsoever, but, Big Bank would rather insist on playing this modification game. It is as if Big Bank is convinced that these home owners are secreting away riches that they will ultimately turn over if Big Bank just plays hard ball. That is not the case, though. Would Big Bank not profit more by having all the principal and most of the interest paid instead of realizing about two-thirds of the value of the home in a foreclosure? Nevertheless, Big Bank marches on oblivious to the consequences even to themselves.

If you are going to do a home loan modification, seek out an attorney who has had an experienced track record of succeeding in them. He or she will be able to tell you up front if you qualify. But, do not wait too long before consulting with a bankruptcy attorney about Chapter 13 to save your home. The clock is running.

PS: These “inspection fees” apparently are charged every time someone calls the home owner and asks if they are still living in the house – incredible!

August 21, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Property (exempt, Security interests | , , , , , , , , , , , | 1 Comment