by Jason Jones, J.D.
August 4, 2011 (San Diego)--As a bankruptcy attorney, I meet with clients everyday who struggle to make mortgage payments on their homes. Most of these clients participate in their bank’s loan modification program. But despite government pressure on banks to offer loan modifications, the sad truth is that most clients will never actually receive a modification.
Despite this fact, the bank’s programs will “consider” every applicant; no matter how likely they are to ultimately qualify. While it seems like this over-inclusiveness would be good, or at least neutral, it is in fact harmful to the struggling homeowner.
Being in the loan modification process prevents the individual homeowner from facing the actual underlying problem: the need to move to more affordable housing. As a result, the affected homeowner makes poor decisions and their emotional and physical health can suffer as a result of the false hope offered by a bank’s home loan modification program.
Right now, the loan modification process goes hand in hand with the foreclosure process because most banks will not consider a loan modification unless the borrower is in default. The homeowner has to stop paying on the mortgage before the bank will talk to him. Only then is he allowed into the modification process. Meanwhile, the bank begins increasing the amount owed by the homeowner by tacking on late fees and penalties, will start making collection calls, and will decrease the homeowner’s credit score. The bank will also file a notice of default, which is the first step in the foreclosure process.
Before the rise of loan modification programs, a foreclosure took approximately six months to complete. Not anymore. The average time from notice of default to foreclosure in San Diego County is 332 days, or eleven months. Much of this increase is due to the current home loan modification process.
You might think this extension is actually good for the homeowner, giving him time to get back on track. But actually, it is not. Once a borrower submits paperwork for a modification, the bank lets the foreclosure process go forward, and will repeatedly issue short extensions to put off the sale until the loan modification is approved or denied. Only 23% of homeowners who applied for a loan modification in California received a permanent loan modification. Hardly any of these modifications involved any principal reduction.
During this entire period, the homeowner is typically led to believe he will receive a loan modification, even if there is no objective way he can afford the house. Loan servicers are typically not willing to be frank with borrowers who simply cannot afford the payment, even with a modification. All are sent through the system with assurances that the bank will try to make a modification happen. Over and over again, the bank will ask the homeowner to resubmit information that has been “lost” or has become out of date by the time anyone at the bank looks at it.
Meanwhile, the foreclosure process is nearly complete. When the loan modification is eventually, and suddenly, denied the trustee’s sale is scheduled to occur within days. The homeowner has made no preparations to move out based on false hope that a modification is just around the corner. This is where the homeowner usually turns to bankruptcy just to gain a few extra weeks to sort everything out.
Of course there is other harm too. For a year, the family has been living under the constant stress of the uncertainty caused by the process. This places strains on marriages and hurts physical health.
The false hope created by this one size fits all loan modification process creates more problems than it solves. It prevents people who cannot afford their homes from making correct economic decisions. It inflicts emotional damage on those tangled up in the process. It also hurts society as a whole, slowing down the housing recovery by stretching out the surplus of phantom inventory.
Ultimately, we would be better served by an honest loan modification program that excluded those who cannot afford a modified loan from the process. This would speed the process up for those who do qualify, and would reduce the harm to those who do not.
Jason Jones is a principal attorney and founder of Avatar Legal, P.C. based in the Carmel Valley area of San Diego, California. Jones heads the firm’s bankruptcy division, leading clients through bankruptcy and foreclosure processes, and fights on their behalf against financial institutions and mortgage lenders. For more information, visit www.avatarlegal.com. The opinions expressed in this editorial reflect the views of its author and do not necessarily refl
ect the views of East County Magazine. To submit an editorial for consideration, contact email@example.com