How Banks View Loan Modifications

I can’t think of any subject that has been so widely and frequently discussed and studied, over such a long period of time, by such a large number of experts and observers, who continually espouse such a diverse range of opinions and cite such a large number of conflicting facts, that is still is so misunderstood… or understood differently by different people… or in short, is such a mess… that affects so many people… and is so important to our government and our economy… yet remains pretty much unsolvable… AS LOAN MODIFICATIONS.

See… loan modifications today represent such a complex subject that even writing a sentence describing the situation surrounding them, such as the one above, was a pain in the neck.

Let’s start with the questions on everyone’s mind… Why aren’t more loans getting modified? Why is it so difficult to get the bank to modify a mortgage? Why are trial modifications ending in foreclosure? Why is it that people are consistently treated so poorly by the banks? Is it the investors that are making it hard to get a loan modification? Is the government doing enough to get banks to modify loans? And should people hire an attorney to help them obtain a loan modification, or go it alone? That’s at least a pretty good start, right?

I think the fundamental thing that almost no one understands involves how a bank views a borrower’s request for a loan modification. Lot’s of people, including me in past articles, have said that banks simply don’t want to modify mortgages. Lot’s of people, including me, have also pointed out that servicers make more money by foreclosing than modifying loans.

All of those points apply in certain circumstances, but they’re also beside the point to some degree.

A Banker’s View…

Your bank views you calling to request that your mortgage be modified as the beginning of a process. Maybe you truly need and deserve a loan modification, but maybe not. The only way the bank will be able to tell one way or the other is by putting you through that process, and it’s not a pleasant process in the least.
Let’s say that you’re someone that has good credit, you’ve never missed a payment, and now are saying that you need your loan modified or you may lose your home to foreclosure. When you call your bank to ask about a loan modification, they’re going to tell you that they can’t talk to you until your payment is delinquent by at least 30 days.

You hang up the phone. You’re disappointed. And you now have your first decision to make: Do you let your credit score get trashed by going 30 days late on your mortgage? It’s not easy decision. Once you head down that path it’ll be years before your credit score is back up where it’s always been, and if you need your credit to be good for other reasons, chances are you’ll decide that you no longer want a loan modification because the cost of trying to get one… sacrificing your credit score… is too high.

The bank’s process has just saved the bank quite a bit of money. Had the bank agreed to modify your loan, it would have been like throwing money away unnecessarily because you kept making your payments without them having to modify your loan.

Now, let’s say that you decide to go 30 days delinquent on your mortgage. You call back, now 30 days late, but now your bank tells you that you have to be 90 days late before you can be transferred to a negotiator. You hang up the phone. Again, you’re disappointed. Do you go 90 days late, or do you bring your loan current and forget the whole thing? Some bring their loans current, others don’t.

If you don’t bring your loan back to current status, you’re about to start receiving a series of letters and phone calls designed to make you feel ashamed, guilty and scared. And those letters will come more and more frequently, and they’ll be written using stronger and stronger terms. And chances are you’ll feel worse and worse as time goes by.

Then in 90 days, assuming you’ve gone the distance, you call the bank again. This time they’ll tell you that your credit score is now too low to qualify for a loan modification. Now you’re enraged. You stomp your feet. And then, if there’s anyway you can do it, chances are you bring your loan current and try to forget the whole idea of a loan modification. Maybe you get rid of a car payment to do it, maybe you rent out a room or take on a part-time job to generate the extra income you need, or maybe you borrow the money from a relative.

You never even bring up the whole experience to your friends or family members because you’re ashamed that it even happened. You’re ashamed that you were having trouble making the mortgage payment that you signed up for, and you’re ashamed about having gone 90 days late on your mortgage payment and almost losing your home. The whole thing becomes one of those skeletons that you hope will soon fade away in your closet of memories.

Besides, what would your friends or family members even say if you did tell them? Do you think they’d be on your side and angry at the way your bank treated you? Or would they take the view that the bank had every right to handle your situation the way they did, because after all, you signed the mortgage and agreed to make the payments… the bank has no obligation to lower your payment just because you having trouble making it. You’re lucky the bank didn’t foreclose, in the eyes of your friends or family members.

Oh, and one or two more things, while we’re at it… maybe you should have opted for a little less house and not gone quite so far out on a limb… maybe you should have spent a little less on your car too, and not used your credit cards for all those nice clothes you wear… maybe you’re just living way beyond your means. You’re probably not saving for retirement either. You’re one of THOSE irresponsible people and maybe losing your home to foreclosure would teach you a lesson.

Whew… it’s exhausting, isn’t it?

But, let’s say for a moment that you could not find a way to bring your mortgage payment current when told, when you were 90 days delinquent, that your score was now to low to qualify for a modification. Now you’re 120 days behind, and soon it’s been six months since you’ve made a payment to your bank on your loan.

By now the bank is sending you the most threatening letters imaginable. They could foreclose at any moment, according to the letters and their tone tells you that you are basically an irresponsible failure who cannot be trusted because your word means nothing. You promised to make the payment and now you’re not living up to that promise. You’re a promise breaker… a liar. How do you sleep at night? You shouldn’t even have friends, because if your friends knew what you were up to, they likely wouldn’t want to be your friend anymore.

Nonetheless, you’re now seven months late, then eight, and then nine. Now the bank is calling you almost daily, the pressure is becoming unbearable, you’re trying everything to make more money so that you can make the payment. If you do find a way to come up with the cash, you bring your mortgage payment current immediately. If you get a new job that pays more, you call your bank and start begging and explaining that everything is going to be okay… you’re working again… if they’d just please understand… you’re a good person… you’ll pay your payment every month and on time from now on… you’re sooooo sorry to have gotten behind… How about $1200 this week, and then $1200 the following week, and then $2000 by the end of the… blah, blah, blah.

You’re a babbling fool that will agree to just about anything the bank says at that moment. If the person you’re talking to at the bank acts the slightest bit nice to you, or comes off as even a little bit understanding of your situation… you gush with appreciation and feel like you want to be their BFF. Thank you, thank you, thank you, thank you, thank you, thank you… really… thank you so much. My husband thanks you, my children thanks you… my dog thanks you. Yuck. It’s disgusting, really. I just threw up in my mouth a little.

Or, maybe that’s not what happens. And now you’re almost eleven months late. You’re working. You could make a reasonable payment if you weren’t so far behind. You’ll never be able to pay off the arrears though, so what’s the point. You’re desperate… you’re about to give up and resign yourself to the fact that you’re going to lose your home to foreclosure. You’re trying to get used to the idea that you’ll soon be packing and calling the moving truck… its heart wrenching for anyone to watch.

Well, guess what? Depending on the specifics of your situation… whether there’s any equity in your home… how far underwater you are… how long are homes like yours and in your area remaining on the market before being sold? Things like that.

Do you see what’s going on?
Since foreclosure is now imminent, the bank can’t threaten to ruin your credit score anymore, as it’s already ‘F’ and would be ‘G’ if scores went that low.

The bank is now trying to figure out two things:
1. What is the likelihood of you being able to make the payment if the bank modifies your loan? What if they take the amount in arrears, tack it on to the back end of the loan, and reduce your monthly payment by a couple hundred a month? Would that do it? Or would you agree to the deal and then not be able to make the modified payment… and again in six months end up right back in foreclosure where you are now.

If the bank thinks that might happen, they won’t modify your loan. They’d rather foreclose now than go through this same thing next year and end up foreclosing then. Real estate values will likely be lower next year, so by waiting the bank just assures itself of a bigger loss on the property.

The cost of foreclosure to your bank is going to be 30% to 50%, or even more in the worst of instances. But that’s not the most important factor to your bank… this is all about your bank’s degree of certainty that if they modify your loan, you won’t be back in foreclosure anytime soon, and likely never. Your bank views a loan modification as pretty close to unthinkable in the first place, so it’s unquestionable that it’s a once in a lifetime thing in their eyes. You should be too embarrassed to even ask a bank to modify a loan a second time, according to your bank. It’s almost like… if that happens, you’ll probably want to change your name and move to another state. What a load of crap the banks have peddled our way all these years.

So, you see… it’s a range. In order to get your loan modified, you need to fall somewhere between “Definitely won’t default again if loan reasonably modified,” and “Will self-cure the mortgage before home is actually taken back by the bank”. Get it?

I talk to people all the time that have recently applied for a loan modification, and they always talk to me about how it will cost the bank more to foreclose on their particular house, so they expect the bank to modify the loan. But then the bank refuses, and I hear people say that they can’t understand it because the bank should do what’s in the best interests of investors. Then we start talking about how servicers make more money foreclosing, all of which is true.

The problem with this line of thinking, however, is that it fails to incorporate all the data… it’s not just a numbers game to the bank. First they need to know, if they offer you nothing, will you really end up losing the home to foreclosure, or will you let the Devil himself rent out a room to avoid that shameful outcome? Then they need to know that if they do accommodate you and provide you with a modification, chances are good that you’ll never miss a payment for the rest of your life.

To read the entire article click here