“Yes Virginia……………… there is a Predatory Loan Modification.”
For three years, the US has been subjected to all manner of communications from the government, the media, and lenders about loan modifications. For two years, I have, with increasing frequency, been reviewing actual loan modifications granted to borrowers, and loan modification offers. Over the past six months, I have been doing exams with paperwork included about loan modifications. And March 30, I wrote an article about the results of the HAMP loan modifications.
With what I have learned and know, it is time to finally put words to paper (or to the internet) about what is really going on. If attorneys and homeowners are going to fight to save homes, it is time to present to all the facts concerning the loan modifications efforts and offers. Many have seen portions or parts of the whole, but few have actually put it all together. Some have actually used the term Predatory Loan Modification, but they have applied it to companies that were trying to scam homeowners, by offering to negotiate loan modifications for homeowners, but with no real intent. It was those companies that resulted in SB-94 in California being enacted, with a lot of help from the banks, and that put loan modification companies out of business, and stopping large number of attorneys from engaging in loan modification efforts.
Predatory loan modifications come in many disguises and may include the actual offer, or just the negotiations of the loan modification. The purpose of the modification is to whether now or in the future, to cause the borrower to lose the home. It has no other purpose than that. I shall endeavor to explain many different ones, and then I shall offer an insight into where the next “Battle for California” and the rest of the US must take place.
Same Rate – Higher Payment-Taxes Included
Throughout 2008, this was the most common Predatory Loan Modification. It was seen quite often with Sub-Prime loans, but other loans as well. It is still seen today.
The modification featured an interest rate which was the same as the current rate, but a higher monthly payment. The payment increased because arrearages were packed onto the back of the loan which resulted in the payment increasing. To add insult to injury, taxes were included as well.
The net effect of this “modification” was to induce the borrower to walk away from the home because they knew that the payments could never be made. Those that did accept the modification would end up losing the home anyway, since they could not make the payments.
Forbearance Disguised as a Loan Modification
A common practice used in 2008 and also today is to present a borrower with a letter identifying a “loan modification” offer. The terms of the offer are for a period of time, usually from 4 months to a year, whereby the borrower will usually bring in a lump sum to pay a portion of the arrears, and then over a period of time, make higher monthly payments to “catch up” a portion of the arrears and at the end of the term, bring the loan up to date. The lure of this program is that it implies that successful completion would result in a loan modification.
The fact of the matter is that I have NEVER seen one of these plans result in a successful modification. Once the payments are made, the lender denies the modification and demands the arrearages. When the borrower can’t pay, the lender forecloses. With this program, the borrower has “proven” that he could make the payments, so there is no need to modify, in the minds of the lender.
America’s Servicing Company, aka Wells Fargo, is famous for this program.
Option ARM Loan Modification
This is a different loan modification that I have seen offered numerous times, often by First Federal of Ca. The client is in an Option ARM mortgage.
First Federal contacts the borrower, offering to modify the loan. The modification will put the borrower into a 30 or 40 year fixed rate mortgage. The problem is that the interest rate will be 5.5%. In fact, they told a friend that 5.5% was the lowest that they could go by law. This was a portfolio loan that they owned.
Review of the loan revealed that at the time of the offer the borrower was in a loan with a 2.45 Margin. With the Index at 1%, this meant that he was paying a 3.45% interest rate. First Federal would modify his loan to 5.5%, over 2% higher than what he was currently paying. Of course, it resulted in the borrower declining the offer.
BTW, under the FDIC program, the borrower could have been offered down to 3%, and not 5.5%. Glad to see First Federal gone, but since OneWest took them over, it will be just as bad.
Lower Rate – Two Year Term
This is a common offer. With it, the interest rate will be lowered for a two year term, and as low as 2%. However, after two years, the modification ceases and the loan program returns to its original terms. Of course, this only delays the inevitable.
World Savings Modification
World Savings had a “wonderful” modification program. They would contact a borrower and offer a modification for $299. The offer generally dropped the interest rate by .5%. This lasted for one year. At the end of the year, World would contact the borrower with another modification offer. This offer would cost the borrower $499, and would last a year.
Surprised to see HAMP in this list? Why should you be? The lenders and Treasury administer the program.
HAMP modifications offer to qualified borrowers a modification of the loan terms. The terms allow for an interest rate as low as 2%, for five years. After the fifth year, the rate will increase by 1% yearly, until it reaches the Freddie Mac rate at the time of the modification. This is usually about 5%. There it stays until the loan is paid off. Other terms are available with the modification, but to keep things simple, I shall not bother with those terms.
Sounds great with this modification, but here is the catch. I recently evaluated the HAMP program and found that the Mean Debt Ratio for all loans as of Feb 2010 was 59.8%. For March, this Debt Ratio was 61.3%. For the non-lending reader, this means the following:
• If a homeowner has a $10,000 per month Gross Income, and he has a great accountant and tax guy, he is in a 33% bracket for Federal and State Taxes, Social Security, Disability and other Deductions.
• After deductions, his income is $6,667 per month, take home pay.
• Subtract out the 61.3% Debt Ratio and he has $537 per month to live on.
• From the $687, he must cover food, fuel, utilities, medical insurance, clothing, phone, cable and other miscellaneous expenses. And, if he has several children, these expenses continue to mount.
Take into consideration now that the Mean Debt Ratio is the midpoint. 50% of all HAMP mods are over that Debt Ratio, and 50% are under. Subprime loans were for the most part a 50% Debt Ratio, and HAMP is approving them at 61.3% and above. Plus, how many are between 50% and 61.3%, we do not know.
The borrowers are going to face a decision relatively early in the payment process. Do they continue to make the loan payment, and end up having to stop making payments on all consumer debt? Or do they abandon the home, and pay consumer debt? Or do they just file bankruptcy and walk away from everything.
The end result is that most if not all of these modifications will likely fail.
Modification Negotiations That Are Denied at the Last Moment
For the purpose of this article, this is the last Predatory Loan Modification that I will present for review. It is one that I am constantly hearing about.
This Predatory Lending Modification never gets offered. It is all about the process of the modification, attempting to fulfill the requirements of the loan modification process. Common complaints of the process include the following:
• Lost paperwork and faxes
• Never enough paperwork
• Unkept promises
• Paperwork never sent to the borrower
• Trial modification offers but never payment offers for the trial
• Trial modification payments made but the modification is denied
• Modification denied before a trial can start
• Trial payments made, but then the “investor” denies the modification.
The end result is that trial modifications are either never entered into, or if they are, then they are denied at the last moment and foreclosure quickly occurs from there. The common theme in these attempts is a lack of “intent” to do a modification.
The continuing stories being told about the lack of cooperation among lenders and servicers to offer loan modifications led me to pursue the reasons for such behavior. There had to be a common cause, if it could be found. viagra soft tabs Eventually, I found the root causes and it was dependent upon two different issues.
The first limiting factor in whether a servicer will offer a loan modification is based upon the concept of “Advances”. When a borrower misses a payment, the servicer must “Advance” that payment to the Trust to ensure the payment stream. Only at such time as the loan is determined to be unrecoverable can the “Advances” stop.
The only way that the servicer can recover the advances is one of three ways:
• Offer a forbearance whereby the borrower brings in money upfront for arrearages, then makes a few payments, and then brings in the rest due. (This is America’s Servicing Company’s initial offer.) Of course, if the borrower had that type of money, then they would not be in foreclosure.
• Check the Pooling and Servicing Agreement to see if arrearages can be “tacked” onto the end of the loan and the servicer can recover the advances upfront. If not, they foreclose. ( I have a copy of a Deposition that the servicer foreclosure expert declares just that.)
• Foreclose, and sell the property where they take the advances right off the top of the proceeds.
When the modification is requested by the borrower, the servicer will immediately check to see if there is any ability to recover the advances other than foreclosure. If not, they decide to foreclose. But, what is even worse, the servicer will engage in trial modification actions, usually providing a trial modification whereby the borrower will make payments to the servicer. These payments are less than what is owed, so they are placed into “suspense” whereby the payments are not credited to the account. When the lender denies the loan and forecloses, the payments are kept to offset the advances until the home is finally sold.
This benefits the servicer by allowing them to collect payments, and uses up time until the foreclosure can occur, but also denies the borrower the ability to hire an attorney to aggressively fight the servicer. Furthermore, it removes from the borrower money that will be needed to find a new place to live. (There is possible legal actions to consider which I will address further on.)
The second limiting factor is whether the servicer can in fact offer a loan modification to a borrower.
The Pooling and Servicing Agreement (PSA)
The PSA governs what can and can’t happen with regard to the servicing of a loan. It specifically details what can occur when a loan is in default or is facing default. Loan modification is one option covered.
Dependent upon the wording of the PSA, a loan modification may not be possible. It may not be authorized or it may restrict the ability to offer a modification by stating that such a modification may be offered, only if the loan is purchased back from the investor for the full balance due. Obviously, a servicer will not purchase back a defaulted loan that is “underwater” so they will refuse the modification, saying that the PSA does not allow for modifications.
The servicer knows immediately what the PSA says with regard to loan modifications. Do they immediately deny the modification? No, instead they engage in “sham” negotiations, requesting paperwork, financials and other documentation while wasting time until they can foreclose on the property. Often, they are accepting trial payments, knowing full well that the modification will be denied. Again, it is simply a way of recovering money.
What to do?
At this point, hopefully the reader and the attorney will begin to understand what I mean by Predatory Loan Modifications. I have attempted to show the issues with these modifications, and have spent several months attempting to determine an effective way to fight the servicers. Along the way, I have learned much, and I have also seen some actions filed against servicers, but because the attorneys did not understand the entire lending and modification process, gaping holes were left in the arguments.
The key to fighting the servicers on the modification issue is to attack the modification process, and show lack of intent to engage in a loan modification. In the case of Indymac/One West, you walk into court backed up by a PSA stating that the servicer could not do a modification without buying a defaulted and underwater loan from the lender. Then, you present a quote from Sheila Bair, head of FDIC, saying that Indymac PSA’s do not allow for loan modifications.
At that point, you are not done. You show the Deposition from an Indymac foreclosure expert that states their key determining factor is whether OneWest can recover “advances” from a PSA, and if it is not possible, they foreclose without regard for anything else.
Finally, you back up your arguments showing the communications between the servicer and the borrower, and showing that their modification actions were “sham” negotiations.
Oh, by the way, I have two court rulings, one in California and one being a 5th Circuit decision that states if a lender engages in loan modification negotiations with no intent to actually do a modification, it is fraud.
Think you can make a Court take notice with this type of an argument?
I have now presented the case for Predatory Loan Modifications and how this is the next stage in the “Crusade for Homeowners”. No longer can the fight be regarding TILA/RESPA where homeowners lose daily. Lenders know how to fight that. Nor can it be the foreclosure process, which only delays a foreclosure.
I propose that you fight the lenders based upon three significant issues:
• Fraud in the origination of the loan at various levels, and using an Agency/Assignee Liability argument to implicate both the lender and the broker. My Predatory Lending Exams show the way.
• Fight the Foreclosure Process so as to delay the foreclosure and to allow time to present actions based upon Predatory Loan Modifications. (BTW, were you aware that CA CC 1095 in California requires that in any Assignment of Deed of Trust signed as Attorney In Fact requires that the party being acted for be disclosed, or the document is void? I see this error quite often.)
• Fight the Lack of Intent in Loan Modification Negotiations.
Now, as a personal and “shameful” plug for LFI, I would wager to say that you have seen nothing like this presented before. That is because most so-called audit firms have not got a clue about what they are doing. They simply buy TILA/RESPA software so as to determine if the disclosure requirements were met. They have NO UNDERSTANDING of Predatory Lending and what can be offered by competent persons doing such exams.
Furthermore, these people have not stepped into a courtroom, testified in front of a judge, or attended a Settlement Hearing. They cannot know what is important and what is not.
None of these firms have ever thought of the concept of Predatory Loan Modifications.
I spend my days and nights, thinking and living what is happening. I have had to make the hard decisions, and I understand what others are going through. Therefore, this is more than just about being a business.
The reality is that using the same arguments that attorneys are using now, foreclosure arguments and TILA/RESPA, we are only delaying foreclosures. And the banks are winning. Now is the time to consider different tactics, including those regarding Predatory Loan Modifications.
Also, we need to put together cohesive Class Actions which are based upon easily identified classes that have sympathetic Class Members. I have two in mind right now, if the right firm will step up to the plate. (Yes, I do understand the issues regarding Class Actions, and I have tailored the Actions to meet those concerns. If you are an attorney that is interested in my proposals, please call. I WANT to talk with you.)
If anyone personally and professionally knows city and county politicians who have “cajones”, please call me. The cities and counties across the country are facing increasing budgetary concerns. I have been attempting to show cities and counties in CA that they have lost tremendous amounts of money from transfer taxes and recording fees, but the politicians just have no clue as to what I am referring to. What I propose is that with the right politician leading the way, we have the cities and counties attack the MERS and Securitization process regarding the avoidance of Assignments. The cities and the counties have the resources to fight this together that individual attorneys do not have. This could lead to millions in fee recovery, and better yet, a good ruling would then allow all attorneys to “piggy-back” off the lawsuits, and maybe could expose the issues with Securitization and Legal Standing.
A final thought about another tactic that I discussed with an attorney last week, and his comments were favorable. Even the lenders have limited resources. I know this because I regularly get comments from attorneys where they have gone to court and the lender’s counsel has failed to show.
Why not conduct an action whereby attorneys from all 50 states target one lender per month. Imagine the first week of a month, 500 lawsuits filed against a single lender for Predatory Lending. Lenders do not have the resources to react in a timely manner to such an action. Some lawsuits are bound to slip by to the next stage. Sure, like Countrywide, the lender might try to have them all consolidated into one action. But, that takes time, and Predatory Lending Actions do not easily offer the opportunity for consolidation. It may be wishful thinking, but at this point, why not try it?
(Patrick Pulatie is the CEO of Loan Fraud Investigations. He can be reached at 925-238-1221, firstname.lastname@example.org. His website is www.loanfraudinvestigations.com. Articles written by him can be viewed on www.iamfacingforeclosure.com. Patrick is not an attorney and does not give legal advice.)