By Jeff Curl

With the continuing economic turbulence, underwater properties and struggles to keep homes show no signs of slowing.    As of May 2010, California had 412,605 foreclosure sales on the market.  Judging by the clients walking through the doors, it’s not getting better anytime soon.

My job is to help clients keep their homes and belongings, and get rid of the debt.  For clients with homes, I have lost count of how many clients that are attempting to obtain a loan modification.  Many have given up by the time they get to me.  After Bank of America or Wells Fargo loses their paperwork for the fifth time, they just can’t go through the process again.  Or my favorite is where the bank gives the homeowner a “trial period” where the homeowner pays the agreed amount in a timely manner, and the bank then denies the loan modification.  The process appears designed to squeeze the last dollar out of a desperate person followed by an arbitrary denial.

But many of my clients insist on pursuing modifications.   Additionally, many times they will ask to delay filing bankruptcy while the loan modification process is underway.  This can be a risky and unnecessary delay.  First, the new HAMP guidelines made effective June 1, 2010 require lenders to entertain loan modifications for those in bankruptcy, if the borrower is otherwise qualified under HAMP.  Will filing bankruptcy and seeking a loan modification accelerate the consideration, and subsequent acceptance or denial of a loan modification?  Too soon to tell.

Second, things can change to the detriment of the homeowner by waiting.  I have bankruptcy clients that I met with well over a year ago that are waiting for this magical loan modification.  One client qualified for both Chapter 7 and a Chapter 13 with a lien strip (basically removing the second mortgage) at the time we met.  Because he followed his realtor’s advice in seeking a loan modification, the client stopped paying the mortgage.  When he was current on his mortgage, he could have qualified for Chapter 7.  Now that he is several months behind, the home would almost certainly be lost.

The other potential remedy available to the client a year ago was the powerful tool of stripping the second mortgage in Chapter 13.  To do this, the value of the home must be less than the first mortgage.  The second mortgage is then determined to be unsecured and “stripped.”  Unfortunately in this case, my client is one of the few whose home rose in value due to unique circumstances where he lives.  The second mortgage can no longer be stripped.  Worse, by missing so many months of mortgage payments, he probably cannot afford a Chapter 13 plan that includes all of those arrears.

I must have expressed my concern and the potential consequences a dozen times.  I fully understand that homes have economic and emotional values.  But it is this emotional attachment that is hurting homeowners.  They pay predatory loan modification companies money that accomplishes nothing more than taking hard earned money they can’t spare.  Or they don’t realize that the home is unaffordable no matter what modification is coming their way.

Or in my all too familiar experience, the homeowner misses getting a fresh start afforded under bankruptcy protection.  My client’s credit card debt could be wiped out, the second mortgage sent to oblivion, and the home saved.  Instead, he’s now facing lawsuits from other creditors, and now looking as some very tough options because he spent over a year attempting to modify his loan without any success.

Disclaimer: Unfortunately, it is impossible to give legal advice over the internet, no matter how well researched or written. Before relying on any information I give, contact a lawyer to discuss your particular situation. I am a San Francisco bankruptcy attorney. The information given is based on California law.

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.