California Loan Modification Companies May Soon Become a Thing of the Past

If a group of consumer-minded California State Senators get their way, loan modification companies may soon find themselves out of business or scratching their heads as they consider how to successfully adjust their revenue model.

California Senate Bill 94 (SB 94), which looks like it might be days away from being passed by the full California State Senate, would prohibit the charging of advance fees to homeowners in connection with a loan modification, and require anyone who wishes to charge a fee for loan modification services (after performing them) to provide a state mandated notice beforehand regarding the availability of non-fee options for the borrower.

Here’s California State Sen. Ron Calderon (D-Montebello), discussing the measure:

More on yesterday’s development from the California Political Desk at the California Chronicle:

The Senate Judiciary Committee today passed a measure by Sen. Ron Calderon (D-Montebello) that will protect California borrowers who are struggling in today´s troubled housing market.

The bill, SB 94, authored by Sen. Calderon, will prevent a person or a business from charging an upfront fee to a borrower for helping negotiate a loan modification on that borrower´s behalf. Such services are free of charge from non-profit housing counselors.

“Economic times are difficult enough without homeowners having to worry whether they are being scammed when they want to modify their mortgage loans,” said Senate President pro Tem Darrell Steinberg (D-Sacramento). “The bill is a common sense, consumer measure that will make it clear to struggling homeowners that they can get help with their loan modification needs free-of-charge. I commend Senator Calderon for introducing SB 94.”

Tens of thousands of Californians face default and possible foreclosure if they are unable to negotiate a loan modification with their lender. A cottage industry has sprung up to exploit these borrowers, prey on their fears of foreclosure and their ignorance of the complicated foreclosure process. Loan modification “consultants” charge borrowers fees - often up-front and nonrefundable - for services available elsewhere free-of-charge.

“Fear and desperation create a fertile climate for exploitation,” said Senator Calderon, chairman of the Senate Banking, Finance and Insurance Committee. “Borrowers facing financial ruin are misplacing their trust in these so-called consultants who charge fees for limited services that often leave the borrower worse off than before.”

“The Senate Judiciary Committee heard testimony last month about the increasing number of consumer scams targeting people facing foreclosure,” said Senator Ellen Corbett (D-San Leandro), chair of the Senate Judiciary Committee. “I strongly support these important protections that will help to put an end to unscrupulous scammers who take advantage of trusting homeowners desperately looking for help.”

Unscrupulous loan-modification consultants can be found lurking outside every mortgage fair, trolling for troubled borrowers. Their advertisements flood neighborhoods that have been hardest hit by foreclosure.

Senator Lou Correa (D-Santa Ana), in support of the measure added, “I´ve heard horror stories from my constituents who were facing foreclosure and paid thousands of dollars to heartless individuals offering false hope and unmet promises. This has to be made a crime.”

Sen. Calderon´s measure, SB 94, cracks down on these loan-modification con artists by prohibiting lenders from charging borrowers for loan modification services. Non-lenders can charge a fee for helping arrange a loan modification only after providing promised services and informing customers that similar services are available for free from non-profit housing counselors.

The bill´s next stop is the Senate Appropriations Committee.

Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

14 Comments

  1. Deepak Says:

    its a bad news..for everyone..

  2. I for one, will be glad to see the greedy loan modification companies GONE! Great article Ralph!

  3. Tim Says:

    All the fraudulant practices by loan officers, consumers, and insiders need to be addressed and made public. I completely agree with your statement that loan modification fees should be made clear to home owners right up front that this is actually a free service. Mortgage fraud must be stopped. This is just another avenue for greedy, deceptive individuals to profit off unsuspecting consumers. As per our discussion in class earlier today,(Sunday),I would like to see this topic discussed more on the national and local news so that people would be informed that this is a free service. The more consumers are made aware of the opportunists that are out there, the more able they will be to protect themselves from the scam artists. It’s about time that we all stand up and point fingers. From a legitimate mortgage broker, I’m tired of all the profit made from liars and deceptive practices at the expense of the unsuspecting public.

  4. Yes, too many loan mod companies and too many scams amongst them. I have no statistics to back up my opinion but from what I see there are many more scams out there then legitimate companies doing successful loan modifications.

    The other truth that needs to be brought out is the fact that the servicing companies are not approving loan modifications to any great extent. Again, little in the way of statistics but based on comments I receive from my readers their success rate is limited.

    I recently read a report which did indicate that FHA who was allocated money to assist up to 100,000 homeowners through modifications has only received 865 total requests and only modified one loan.

    Servicing representatives (collection agents working for bank owned servicing companies which are not banks) are still telling people that they will only modify a loan if it is 90 days past due. I have a client who has not missed a payment yet, has no intention of missing a payment on anything but is now contemplating going 90 days past due on his mortgage so that he can get a lower rate. He truly believes the agent he spoke with that told him that they would modify his rate once he is delinquent. WOW!! Of course, I advised him not to do that and continue making his payments.

    He reads all the publicity surrounding loan modifications and all of the government programs set up to do them and feels he should qualify for them.

    The fraud that exists here is in the false propaganda put out by the government and the servicing companies. It is this false propaganda that makes it possible for the scams to grow.

  5. Brett Says:

    Another major problem which this article completely overlooks is the fact that these so called “non-profit” and free organizations are so completely understaffed and overloaded that clients files are stacked six feet high. I know this because a relative works for one of them. Many of these neglected clients will lose their home due to free “work” done by these organizations. Some of the pay companies are scams, some are not, if you are diligent and do your research (BBB complaints, internet discussion rooms, etc.) you should be able to find a reputable company that can really help if you are willing to spend the money. As Larry stated, government propaganda only exacerbates the problem.

  6. john Says:

    Beware - What they don’t tell you about the Hope for Homeowners Program

    With thousands and thousands of consumers struggling with their mortgages, it shouldn’t be a surprise that our great government would find a way to get involved. Unfortunately, what they have done is little or nothing. We have scoured the web, spoken to thousands of homeowners, and have yet to find one single family saved by the HOPE program. (If you know of someone, please tell us about is as we would like to be fair and accurate and will post the results) The false hope conveyed to the homeowner by leading them into believing that they will qualify for this program is shameful to say the least. A well intentioned program gone by the wayside with too many bureaucratic loopholes, no real direction and the false promise that you will save your home from foreclosure. And don’t forget that if by some miracle of fate you do qualify, there may be closing costs involved. (If you had money wouldn’t you be paying your mortgage????) And last but surely not least… the big bite in the end, when you decide to sell your home later you could have the government come in and take up to 50% of your proceeds!

    Examples of How Equity and Appreciation Are Shared

    These are examples of how the unique equity and appreciation sharing elements of this program work. Keep in mind that these are only examples, and your actual experience will depend on many things, including how much your home increases or decreases in value

    1. Let’s say your home has an appraised value at the time you receive your FHA mortgage of………….
    $200,000.

    2. And your mortgage is 90% of this, or……….

    $180,000.

    3. This means the initial equity is the difference between 1 and 2, or………………………………..
    $20,000.

    In this example, you and the FHA share this $20,000 when you sell your home or refinance your loan. Here’s how that $20,000 would be split:

    If you sell or refinance:

    During Year 1
    FHA receives 100%, or
    $20,000
    You receive 0%, or
    $0

    During Year 2
    FHA receives 90%, or
    $18,000
    You receive 10%, or
    $2,000

    During Year 3
    FHA receives 80%, or
    $16,000
    You receive 20%, or
    $4,000

    During Year 4
    FHA receives 70%, or
    $14,000
    You receive 30%, or
    $6,000

    During Year 5
    FHA receives 60%, or
    $12,000
    You receive 40%, or
    $8,000

    After Year 5
    FHA receives 50%, or
    $10,000
    You receive 50%, or
    $10,000

    So, if you sell or refinance right after receiving the new loan, the FHA keeps the equity that was created, and you don’t receive any of it. On the other hand, let’s assume you stay in this loan and don’t sell or refinance for ten years. At that point, you’re entitled to half of the equity – in this example, that’s $10,000 – and the FHA is entitled to the other half.

    In addition to this equity sharing, you will have to share any future home price appreciation with the FHA. This means that, if your home has gone up in value between the time you receive your FHA mortgage and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA (less closing costs and a portion of any improvements you have made). This is a 50/50 split that does not change over time.

    For example, if:

    1. The value of your home when you take out this loan is…………………………………………….
    $200,000

    2. After some years, you decide to sell. Now the home is worth……………………………………
    $250,000

    3. That means the appreciation is the difference between 1 and 2, or………………………………
    $50,000

    In this example, you would keep half of this, or $25,000. The FHA would also receive half, which is also $25,000.

    But what if the value of the home goes down?

    4. The value of your home when you take out this loan is…………………………………………….
    $200,000

    5. Now you sell, and the home is only worth……………………………………
    $175,000

    6. That means the appreciation is the difference between 1 and 2, or………………………………
    -$25,000

    In this example, the appreciation is actually negative (the home has depreciated), so there is nothing of financial value to share. As far as the appreciation sharing feature of your HOPE for Homeowners loan, neither you nor the FHA would receive anything.

    These examples assume that there are no closing costs when you sell your home and that you have made no improvements to your home.

    Again, keep in mind that these are just examples, and your actual experience will vary depending on factors such as: How much your home is worth when you get a new HOPE for Homeowners loan, how long you stay in your home, and how much your home is worth when you sell.

    i can can get a free lawyer too when they pass this bill who will
    be the scam in the end i have a loan modification on my home
    it worked for me. with this law we H O P E it works for you.
    Hope is the big scam free my a_ _
    thanks to the loan modification companie for saving my home

    this is a cover up to hide the bad loans from america.. god bless

  7. john Says:

    ask the senate appropriations committee to try hud with their home first. thay dont have the trouble we have thay get paid up front.
    i would like to see them not get paid until the bill is passed ha ha
    i wish thay would go after the lenders sory thay our the lenders

  8. john Says:

    were just children and need our government to make up our mind for us. thay no what is best for all of us, we would have the great loans with out them. let them tell us who to trust with last of the money thay saved for you. they have government service for the homeless to in just in case thay our wrong. so why worry let them pass the bill and we can end this. have only hud to hope
    us the this. A government monopoly what could be better then this
    For Us. Bless all the LITTLE hearts for taking care of us god love them dont be scamed by a loan modification company that can help you. LET HOPE SAVE YOUR HOME RESISTANCE IS FUTILE

  9. john Says:

    IT GETTING LATE

    were just children and we need our government to make up our mind for us. thay no what is best for all of us, we would not have the great loans with out our great lenders and Goverment (kissing up my help). let them tell us who to trust with last of the money that Bush saved for you. they have government service for the homeless to. just in case thay our wrong. the program puts your kids in a nice place and you can call them from your home on the street, or local homeless shalter if it open, or they don’t run out money, or have ROOM When Hope Is OVER. if you have pets no trouble at all thay have pland for that to, put them to sleep. you just cant aford them. NOW we can spend The last of our money on hope. thay spending alot money on hopeing to save your home, “so why worry” let them pass the new bill that says no one can help you just hope. and we can end all this now. imagine only hud to HOPE us With this. A government monopoly, what could be better then this For Us? Bless all the LITTLE hearts for taking care of us, god love them, and remember dont be scamed by a loan modification company that can help you. LET HOPE SAVE YOUR HOME

    (RESISTANCE IS FUTILE) Hope Not Help

    good luck all god bless

  10. Sandra Says:

    I get so disgusted with all of the “scam” B.S. I know it exists, but because of this, reputable companies who really DO help homeowners with modifications and foreclosure avoidance are going to be shut down. I work for a company who is very honest and we get modifications approved for homeowners who have TRIED the “FREE” services and who have been told by the “MEDIA aka GOVERNMENT” that lenders will help them for no charge. So, we always suggest that they try to resolve with their lender or servicer first, and guess what? 9 out of 10 come back to us because now they are worse off then when they first contacted us! Lenders are telling borrowers that they just need to foreclose, they make too much money or not enough to qualify, some offer a forbearance which RAISES the monthly payment that the homeowner already CANNOT AFFORD, and the best one I have had to date, they told one of my past clients to call the OBAMA ADMINISTRATION FOR HELP! We have an advance fee agreement with the DRE and that is because we are dealing with very high risk clients who cannot pay their mortgage. What the haters don’t tell anyone in is that when lenders/servicing co.s approve a modification, that a mod company has submitted and negotiated, they are sent directly to the homeowner for signatures. When homeowners get their modification, why would they then pay? They don’t! So, why should a business have to spend several hours on the phone negotiating a fair modification, package a proposal to the bank and set up financials that work and not get paid for that? That is why advanced fees are collected. Now a money-back guarantee is what needs to be enforced. If the homeowner is NOT approved and helped, ALL MONEY SHOULD BE RETURNED because that is just the right thing to do! I know alot of companies that skate around their refund policy. But why should attorneys, loan mod experts work for free? I can cut my own hair, but I pay an expert! I can fix my own car, but a pay an expert! I can mow my own lawn, but I pay a gardner so I dont have the headache. I even pay my gardner in advance! I can optimize my own website, but I pay an SEO company to do it because they are experts and devote the long hours for success, I PAY THEM IN ADVANCE too! That doesnt mean they are scamming me, I can get a refund if I get no results, but I have to prove it! You get the point. Hopefully. The last I am going to say is, the Govt is interfering because the BANKS OWN THE GOVT. if you havent figured that one out by now! Many loan mod companies are obtaining very successful mods for their clients when the banks and non-profits have failed miserably! Banks have alot to lose. They are in business. Businesses earn profits! We have had very few complaints from some clients because they wanted 2% and got 4% from a 9% rate. Well you cannot make everyone happy because those people you can never please. We still saved them a substantial amount of money and got them back in good standing at their lender. And the saying “YOU GET WHAT YOU PAY FOR” is always going to remain true. COME ON PEOPLE! GET A CLUE. Homeowners need help! JEEEZ! Okay, back to work. I have several clients and I need to help save their homes.

  11. Unique Says:

    If this is passed, not only will it be a disservice to the American people but a disservice to any loan modification company that does perform the functions needed to assist homeowners in getting a modification. If non profit organizations were successful at getting modifications for homeowners, we wouldn’t be in such a financial crisis now. The reason why these companies exist is very simple. The servicing companies that the lenders/back-end investors use to service these loans and approve/deny modifications 1) have poor communication with the homeowners 2) have horrible processes and procedures as it relates to modification processes 3) are more interested in scare and stall tactics with homeowners than providing the homeowner with a modification that would help the back-end investors/lenders have performing assets. Instead of trying to eliminate the modification companies that are trying to help homeowners keep their homes, why hasn’t anyone audited the servicers? Half of the time, you’re speaking to someone thats from another coutry or you’re unable to speak to anyone. Why does it take 3-6 months for a modification to be approved? Why aren’t homeowners notified of the terms and conditions of their new modification prior to the modification agreement being drafted and sent to the homeowner (who is oblivious to the new terms and conditions)? Why can’t anyone ever speak to the negotiator that approves or denies the modification? Why does the servicer assign sale dates to properties that are in review for modification? These are some more valid questions and I’ve got plenty more! Work on that Senator. Or better yet, call me and I’ll let you listen to a conversation that I just had with Saxon Mortgage who denied a homeowner a modification that she didn’t even know was approved. These politicians aren’t helping homeowner. We are!

  12. Shaun Says:

    Why pay thousands for someone to do this for you when you can get live support 7 days a week and everything you need to get the modification done at home? This is clearly the best value and it takes the guessing game out of who to trust with your modification Go to: http://www.financialaidamerica.com

  13. Craig Says:

    Although this topic is surely a controversial one, no one can argue the fact that millions of owners are or soon will be in trouble & not enough is being done to help them. Free or fee, a really good loan modification will save the homeowner many times more in the next few years or for the life of the loan. The stats that I have read from reliable sources show that 20% of people who tried to get loan mods on their own succeeded, bravo. 80% failed. Of all who got loan mods in early 2008, about 1/2 were back in default by year end. Must have gotten small reductions that really didn’t help for long. I read from a on line legal source that many of the non-profit free modification services were funded with $300 million from servicing banks. I have been wondering who is funding them. If that is true, can we believe that they are going to really negotiate the best modification for those who use the service? Maybe its like the legal system. Most of the people in prison used the public defender as opposed to hiring a good lawyer. Maybe the best loan modifications are gotten by the best loan modification sources, & may be worth every penny invested.

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