We have found that Loan Modification and Bankrutpcy work well together. The Holy Grail of this current real estate mess is to modify your first mortgage, have San Jose and Monterey Bankruptcy Attorney David A. Boone strip your second mortgage off the house, and have the bankruptcy get rid of all that other debt!!
Loan Modification can be done before, during or after a bankruptcy case. If you can do it before you file – great!. This is getting easier because recent changes in the law say they can not start foreclosure while they are considering a loan modification. Prior to this, the Lenders would start foreclosure while “considering” your loan modification. They invented the term “pre-foreclosure” to calm down hysterical homeowners. But there is no such thing. When they file the Notice of Default you are in foreclosure under California Law and there is no pre about it.
Most Homeowners file Chapter 13 because it stops the foreclosure immediately — you get an automatic stay the moment you file and all creditor actions must stop. Anything done in violation of the stay is void. Lenders need to get permission before they can go forward with the foreclosure. They need to file a motion for “Relief from the Automatic Stay”. Bankruptcy Courts are generally sympathetic to Homeowners who are trying to get a loan modification and order the lenders to take the proposed “HAMP” or other modification proposal payment while considering the loan modification.
During the Chapter 13 bankruptcy, you work with the bankruptcy or insolvency department of the lender and it seems to us you get better treatment as the matter is more urgent. We find that you talking directly with the lender is a much more friendly interactive procedure than us getting in the way. Whether your attorney or a hired loan modifier, a third party adds nothing to the loan modification success rate. This is why it has been illegal for anyone, including attorneys, to take any money from you up front as a fee for a loan modification since October 8, 2009. That includes forensic audits. Reading your loan documents is not a forensic audit. And please don’t sign up to sue your lender because they don’t have the note, etc. Please don’t do that.
In a loan modification, the lender looks at your income, looks at the value of the property and sees if a payment of Principal Interest Taxes and Insurance can be put together at an interest rate, usually at least 2% per annum, that will pay your loan over no more than 40 years. We have now thrown out all the Enron scandal accounting rules, so once they modify the $600,000 loan on the $300,000 house, the lender can put it on their books as a $600,000 asset. See why no one believes the financial statements of the big Lenders.
The alternative for the lender is to foreclose your loan and suffer a huge capital loss for the upside down value of the loan/house and the additional foreclosure, cleanup, and sales costs of disposing of the property.
So when you have equity, that might cover all the costs of foreclosure and get them paid in full, maybe make a little extra, so there is no motivation for your lender to do a modification of your loan. You are right, that isn’t fair. One other very common thing that is not fair is when you have good income, but you are paying 6.5% interest in a 3.5% world. If your payment at the higher interest rate is less than the 31%, you are not getting a modification. But don’t get mad at me, I am just telling you the truth — how this seems to be working out, or not working out.
If you have an opportunity to go to one of the huge meetings held by your lender or your lender participates in one held by NACA or another non-profit help organization – Go to it. This is a chance to get face to face attention and consideration of the potential for a loan modification. Go armed with proof of the gross income you need to have to get a payment at your target interest rate. If you don’t have a financial calculator then go online for a loan amortization calculator. Sites like www.bankrate.com have not only loan amortization programs but current values for all the indexes used in todays variable rate loans .
And don’t make a common mistake of leaving out reliable child support, the rent from your sister who lives with you, social security and disability payments received by your disabled child who lives with you. All of this is reliable income that can show you can make the payments on your modified loan for the long term. A lot of people think the strategy is to look pitiful. Wrong. That strategy gets your application dismissed as hopeless and the foreclosure is on the way.
The correct strategy is to show the lender that you can make the payments on your upside down mortgage and the lender is better off having you pay them a greatly reduced interest rate on the full balance than taking the capital loss. Then it is a good deal for the lender and you get your modification! Sometimes we are able to get a principal reduction, but those are few and far between and usually are done in loans the taxpayers own. Remember, principal reduction is a capital loss, same as a foreclosure and resale, so stress the affordable payments path.
Finally, why should you try to keep your upside down house. Because its your home, it has those fruit trees you planted, whose gonna rent to you and those dogs/cats of yours, etc. And its a better inflation hedge than gold, you get to live in it. Someday, your $300,000 house will have a price of $1,000,000 because of relentless inflation and the debasing of our currency. Unfortunately, you’ll be buying a $75 loaf of bread on the way home to your $1,000,000 house.