By: Jeena Cho

Just in the last 2 weeks, I’ve received at least a dozen or so inquiries from home owners, realtors and others about loan modification. We don’t do loan modification and most San Francisco loan modification attorneys I know has  stopped doing them since new Civil Code Section 2944.7(a)(1) went into effect. In short, the law prohibits receiving money upfront to do loan modification. If anyone requires money upfront to do a loan modification, they are violating this law.

It is unfortunate that the banks seem more willing to take the loss on a foreclosure then to work with the homeowners and work out a loan modification. One solution that has been proposed is to give authority to the bankruptcy judges to modify the mortgage. This legislation has been shot down. It is one of the great ironies that bankruptcy judges can change the terms of the loan for every other types of properties (including rentals, commercial property, etc.) but not primary residence. In my opinion, a loan modification is not meaningful if the principal of the loan is not adjusted to reflect the value of the home. If your property is under water by $100,000 or $200,000, what good is a teaser reduction of interest rate?

In these difficult economical times, homeowners need to face the reality that it may not be possible to keep the home. I meet with clients almost everyday who could not afford their mortgage even if the banks had offered 0% interest. This is frequently the case with people who signed up for Neg Am loans. Once the Neg Am term comes to an end, very few people can afford the principal and interest payment.

Most homeowners I know that has tried to get a loan modification deals with the banks losing the paperwork (at least 2-3 times). Being told a different story by every single representative. And in general, getting the run around. Of those few clients I’ve seen actually get a loan modification, the change is not meaningful enough to make any difference.

One client recently received a letter from Chase offering a three month trial period. What I found to be interesting about the “offer” is that it specifically says the account will not be brought current. Chase specifically reserves the right to terminate the plan and continue with the foreclosure. In another words, we reserve the right to take your money and not give you a loan modification! This homeowner will fork over $10,000 in the three month trial period but there is no assurance that the bank will live up to its end of the deal and offer a loan modification. I could not have thought of a worse deal for the homeowner.

Currently, debtors that file for Chapter 13 can “strip” the second mortgage provided the value of the home is less then the first mortgage value. This may be the only true meaningful change for a homeowner that doesn’t put the homeowner in the bank’s mercy. At least one bankruptcy court in Orlando is contemplating requiring the banks to negotiate a mortgage modification with Chapter 13 debtors. Another benefit of Chapter 13 is that you can cure the arrearages of your first mortgage. For many homeowners, their property has decreased so much in value that stripping the second mortgage won’t make any difference. For others, they can’t afford the mortgage payment on their first mortgage so the lien stripping won’t help. However, if you can afford to make your first mortgage payment without the second mortgage dragging you down, Chapter 13 may be a good alternative.

Disclosure: I do not do loan modification. Please read our disclaimer.