Why Loan Modifications Don’t (Usually) Work

By Andrew J Thompson

The only thing that can help most homeowners who are behind on mortgage payments, is a reduction in their monthly payment.   Loan modifications don’t often work out because the programs created by banks and HAMP – the federal government’s “Home Affordable Mortgage Program” –  do not allow enough flexibility for homeowners to actually reduce their loan payments.  

This is true because the real purpose behind most of what is in the modification programs is to try to enable the banks to collect the full amount due on the loan as quickly as they can.   The banks want to do this, of course, but they want it in spite of the reality that the homeowner is only behind because he or she (or they) can’t make their current payment.  What ends up happening is that a sort of, modification “shell game” is created that the homeowner can’t win.

The lenders put the homeowner though a long process of essentially re-qualifying for a loan, at the end of which, the homeowner typically qualifies for a reduced payment of principal and interest – only to learn when the full terms are disclosed – that there is a kicker: the arrearage alleged by the lender must be repaid on a schedule that actually increases the total payment the homeowner must make.  Of course, the borrower only learns of these terms after a long, drawn out process, which has lead them to go further into default on the loan (on the expectation that they will qualify for more favorable payment terms), and leaves them in a worse position than they were before the process started.

So what is a homeowner to do?  For the most part, I believe the defaulted homeowner is better off to skip the whole loan modification process.  First of all, there may be very serious problems with the mortgage and promissory note, and it may not be necessary.  You may have more rights than you know.  In a few instances, a loan modification may work, but only when there a a few pre-conditions: 1) the creditor agrees to an arrangement during the approval process that allows you temporarily to reduce your payment, without going further into default.  Most lenders won’t do this, but if they won’t, you are not going to come out ahead in the end, and it is not a worthwhile process; 2)  any catch up arrangement for an arrearage will necessarily be structured so that the overall payment – principal , interest and the catch up – will be less than the original payment.  Otherwise, the loan modification CANNOT work.

But it is very rare to find a lender who will agree to such provisions.   yet if they don’t, the whole process is a sham – designed for failure from the outset.  If that turns out to be the case, it’s probably time to seek counsel to assist you in deciding how best to proceed.  Your rights need to be protected.  Protect them in the best way you can.

If you’d like to discuss your options with our staff, please contact our office at (877) 365-1776 toll free or (317) 564-4976, or contact the author vial email: ajt@thompsonlaw-in.com.

 

Issues with Existing Mortgages and Foreclosures

By Andrew J. Thompson, Attorney

On one hand, the “mortgage foreclosure crisis” in America today is so enormous and widely discussed, everyone knows the seriousness of the problem that exists with the handling of mortgages in our country in the last decade.  On the other hand, as a homeowner, you may have found it very, very difficult to do anything to protect yourself or even to clarify the precise status of your own mortgage, even to give you comfort that you could ever actually pay off the entire balance and obtain free and clear title to your own property.

Below I have listed the critical areas and problems with mortgage debt in the marketplace today.  I recommend you consider talking with competent, legal counsel soon to better understand the depth and scope of the potential problem for your own mortgage.  It could mean literally hundreds of thousands of dollars to you in the future.

Promissory Note vs. Mortgage

When you closed on the purchase of your home or the financing you obtained to leverage the equity in it, you were asked to sign many documents.  The two most important documents you signed were your mortgage and promissory note.  The mortgage should have been recorded as a lien against the real estate you own, as a security interest to assure payment of the debt, which was documented by the promissory note itself.  The note and mortgage go hand in hand, but they are not the same.  The mortgage has no value or purpose except to support the claim to collect on the promissory note.  The note represents the debt itself.  It may not be worth much, if anything, if the mortgage, and the value of the real estate, aren’t there to support the note as collateral for payment of the note.

The problem comes in then, when the two are separated.  If the mortgage becomes separated from the note, i.e. it’s claim belongs to someone other than the proper holder of the note, it no longer supports the note, and cannot be used as an enforcement tool for the note.  Yet, it has been common practice for many, many years for lenders to “negotiate” notes to third parties, and to allow mortgages to be assigned to other parties.  This is true even though the United States Supreme Court has held long, long ago that the assignment of a mortgage, without the note going along with it – is a “nullity” – as if it never happened.  Arguably, once the separation of the two instruments is documented via the assignment of the mortgage, there can be no legitimate claim by a lender to enforcement of the mortgage.

This involves complex legal theory – and it is rarely if ever tested in the courts.  In most states, it has never been clarified whether this “nullity” destroys the security interest of the mortgage, but it is clear that it creates a “cloud on title”.  The problem has become so large and pervasive, it can no loner be avoided.  If a property is sold, foreclosed upon or otherwise transferred, who gets clear title to that property?  How many owners may end up with valid claims of a right to title?  Someone has to sort out this mess, and it has to begin to happen soon.

As a homeowner, you probably want to know that you can sell your house someday – or at least pay off your mortgage, and obtain free and clear title to the property.  Certainly you want to know that you are paying the right party the monthly payments you make, and that you know the balance it will take to pay off that loan – and that the balance is recorded properly.  Given the nature of the situation, you may be  entitled to reduce the amount of your debt – and possibly even claim damages against a lender for improper  actions in handling your loan.  To protect your rights, and assess the situation as it stands today, you need competent counsel to help you through this maze.

Contact the Thompson Law Office at (317) 564-4976 (toll free: 877-365-1776) to schedule time to evaluate your position and determine the course of action with respect to your mortgage(s) that best suits your needs.