Mortgage Modifications Help Bankers, Bankruptcy Helps You
Posted Sep 28 2009 in Mortgages, Wink and Wink by @winkshesaidAn interesting article from USA Today highlights the disadvantages of mortgage modifications. Yes, you read that correctly, most mortgage modifications are a bad idea for the homeowner.
How can that be, you might wonder? If only I could get my lender to renegotiate the terms of my mortgage I would be able to make my payments, allowing me to stay in my house and keep paying my other bills. Well, the problem lies in the never-ending greed of lenders. According to the article, lenders are happy to lower your interest, but they raise your principal balance in approximately 90% of loan modifications by adding fees, back taxes, and other costs. So, approximately 90% of these loan modifications leave you owing more on your home. Are you kidding??
OK – so perhaps that’s not so absurd if you get a real break on your monthly payment. BUT you generally don’t! According to the article, 27% of loan modifications see no change in monthly payment and 27% actually see their monthly payment go up. Wait, so over half of loan modifications see no change or an increase in monthly payment? What’s the point? Well, I can see the banker’s point. TO TAKE MORE OF YOUR MONEY!!
OK, OK – so some 46% of homeowners see a lower payment. Surely that’s good, isn’t it? Well, not if you’re on a much longer payment plan. Many modifications put you on a payback of 40 years. Good luck ever paying that off.
Some people are banking on the Obama administration’s Hope for Homeowners initiative. But I don’t see that helping at all when the initiative focuses on reducing interest rates rather than cutting principal. That approach, cutting interest rates and tacking on extra fees to the principal owed on the property, has been linked to the high rate of “re-defaults”, people who quickly end up in default on the modified mortgage. Want to know how many people end up in default AGAIN after a mortgage modification? 41 to 46%!!!!!!! Great deal, huh? Great deal for the bankers pocketing $1,500 per modification, what do they care if almost half of them will default within eight months?
The real problem is that too many people owe more on their home than they are worth. Zillow.com estimates that approximately 20 million mortgages in the U.S. were underwater as of the end of Q1 2009. And Deutsche Bank estimates this figure will rise to 25 million, or 48% of all mortgages, by 2011. Wait, let me restate – experts predict that nearly ½ of all mortgage will be underwater by 2011. In Colorado, where I practice bankruptcy law, the Denver Post has reported that nearly 1/3rd of all homeowners who have purchased a home in the metro Denver area in the past five years owe more on the house that it’s worth. Tacking on extra principal makes this problem worse. If you are underwater before seeking a mortgage modification, imagine how much worse that will be on a 40-year loan.
So, mortgage lenders are happy to take your money while you try, often in vain, to stay in the house. They want you paying them as much as you can while they string the modification process along. What happens if you are in the group of people who’s payments go up after the modification? What if the lender, after months of stringing you along and cashing those checks, finally tells you there is nothing they can do for you and they are starting the foreclosure process? What if you are given a slightly lower rate and you struggle to pay that new amount every month, knowing you will be struggling to pay it for the next 40 years? For many people, this is when thoughts turn to finding relief through filing for bankruptcy.
My message is to consider filing for bankruptcy first, before you spend more money and time trying to get a mortgage modification that can ultimately hurt you. Bankruptcy offers you the protection of the automatic stay, which means lenders cannot foreclose on your home without jumping though legal hurdles. What that gives most people with underwater mortgages they can’t afford to pay is breathing room: Time to develop a plan for the next phase of their life. Time to live rent free and save up money for a security deposit or find other arrangements. Time free from phone calls and letters and phone calls and letters from the lender trying to get every last cent out of you before they foreclose. And, if you’re one of the lucky ones who just needs time to pay back the payments you are behind on, then bankruptcy will let you do that and stay in your house.
Don’t let the lenders make even more money off you with a bogus mortgage modification. Consider bankruptcy. Bankruptcy is your legal right, giving you a fresh start and putting you in a position of power within the law.
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