Banks Blame Homeowners For Banks' Failure To Issue Permanent Loan Modification

Several news sources have presented myriad explanations for banks' failure to issue permanent modifications as required by new government guidelines. The biggest challenge, according to a December 9, 2009 report in ABC News, is that only one in three homeowners send back the necessary paperwork to achieve permanent loan modification under the Obama administration's new program.

To me, this is shocking.

The amount of paperwork that homeowners must complete to be offered even a trial modification is gargantuan. It is logic defying that 66% of homeowners will comply with the banks and send in this paperwork up to the point they are offered a trial modification, and then stop dead in their tracks and pass up the a permanent modification.

Any bank exec that says that homeowners are not cooperating is lying. Well, maybe not lying (because I'm sure there are some homeowners that have not cooperated), but definitely stretching the truth.

But how can banks rely on this excuse? It's simple, really: neglect to provide homeowners will an complete list of paperwork that is necessary, and then blame them on the back end for not complying with their instructions.

And do banks really do this? YES. At least one bank, IndyMac, has pulled this stunt with my firm. IndyMac approved one of our clients, who will remain nameless, for a trial modification. As part of the trial modification package, IndyMac enclosed a bullet-point list of the documents necessary to accept the modification. I instructed our client to bring me all of the requested documents, met with him for about 30 minutes, and overnighted the complete package and a check for the first month's trial payment to IndyMac. And yes, I double checked my work to make sure every document on that bullet-point list was enclosed.

Less than a month later, when we called to check on the status of our client's case, we learned that he had been denied loan modification. The reason? Because all the documents that were supposedly required were not submitted. Immediately, I called IndyMac and demanded an explanation. IndyMac told me at this time of two or three other documents it needed, including tax returns, were not enclosed with the acceptance package. This was especially surprising to me, because nowhere in any of IndyMac's instructions did it indicate that tax returns or any additional documents would be required.

Ok, fine, I thought. No problem we'll just submit the requested documents and supplement the acceptance package. But no, that would be too easy. IndyMac told me that our client would have to start the entire loan modification process over again, from scratch.

Undeterred, I called again the next day and was able to speak with a supervisor. He was sympathetic to our client's situation and gave me a special fax number so that we could supplement the acceptance package with the required documents. But that was a few months ago, and we still have not received any sort of permanent modification.

Is keeping your (underwater) home the best solution? Maybe not, a new theory suggests

People buy homes for different reasons. Maybe to start a family. Maybe as an investment property. In any case, it is ingrained in homeowners' minds that the goal is to keep the house forever, or sell it at a profit. Losing a home at a foreclosure sale is never something a homeowner would happily acquiesce to.

Until now.

University of Arizona Law professor Brent T. White suggests in a new academic paper entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis" that many homeowners should welcome the opportunity to dump their homes and never look back.

A home is "underwater" if the amount owed on the property exceeds its current market value. Professor White's research indicates that walking away from an underwater mortgage may save troubled homeowners hundreds of thousands of dollars in the following years if they stop paying their mortgage and allow the bank to do what it wills.

White also suggests that societal and emotional factors affect peoples' decisions to remain in underwater homes. Homeowners may be worried about feelings of shame or embarrassment that accompany losing a home through foreclosure, or general attitudes and morals of the community may prevent them from making wise financial decisions.

If a house was 100% financed by the banks, I completely agree with White. The homeowner has little to lose (i.e. no down payment to be recovered) and much to gain (i.e. freedom from a financial sinkhole). It is true that credit scores will take a hit, but this can be repaired in a few years. Hanging on to the house may cause financial discomfort for decades.

If the homeowner made a significant down-payment, I think the decision to walk away depends on how long the homeowner has been in the home. For example, if someone made a $100,000 down payment and has only lived in the house for 12 months, it may be worth riding out the storm and selling the house when the market improves.


Source: Harney, Kenneth R. "Is opting to default wrong?" Los Angeles Times, 29 Nov. 2009, p. B14

5 More California Lawyers Brought to Justice for Loan Mod Fraud

The State Bar of California created the Loan Modification Task Force to combat loan mod scam artists in April 2009. Some background: As the housing meltdown worsened, it became more and more common for scammers to take homeowners' money in exchange for a guaranteed loan modification. Within weeks or months the scammers would disappear without a trace, and homeowners would find that little to no work had been done on their mortgage. In fact, many homeowners would learn they were scammed when the banks initiated foreclosure proceedings against them.

Although recent developments in California law that purport to help homeowners may serve a counter (such as SB-94, see below), the Loan Modification Task Force ("LMTF") gets down and dirty to stop scammers. The LMTF has been successful in exterminating a number of illegal operations; approximately 20,000 attorney files have been removed from the offices of attorneys whose loan modification scam shops have been shut down.

It is recently reported in the California Bar Journal that 5 more attorneys have been exposed and prosecuted. Their practices, located in Los Angeles and Orange County, falsely promised unsuspecting homeowners loan modifications that would allow them to remain in their homes. These attorneys, ranging in age from 34 to 75, have either resigned or been placed on involuntary inactive enrollment. ("Resigned" does not mean retain its traditional meaning here; in this context, it means that the attorney will not be able to practice law in California).

So what can we take away from all of this? For one, the LMTF is achieving success in helping rid Southern California of the leeches we know as loan mod scammers. More importantly, though, is this helpful tip for anyone considering retaining an attorney. Do your research and check their membership record. You can easily access an attorney's disciplinary record by going to www.calbar.gov and clicking on the "Attorney Search" link on the right-hand side of the website. It takes minutes to do and can save you countless hours and thousands of dollars.