After reading about President Obama’s plan to cure the foreclosure epidemic, I wish I could say, “It’s about time!” For far too long, the federal government here in the United States has been focused on bailing out Wall Street rather than Main Street. I was hoping President Obama would reverse the trend. Unfortunately, his plan looks like more of the same.

Obama is setting aside $75 billion… of whose money? According to a treasury official, $50 billion will come from the remaining $350 billion in Troubled Asset Relief Program funds, and $25 billion will come from Fannie Mae and Freddie Mac. This is taxpayers’ money – Main Street money.

And where is that money ultimately ending up? To “subsidize” lenders and investors – that’s Wall Street – for doing what they need to be doing anyway – modifying loans.

The fact is that loan modification is a good business decision for lenders and investors. According to various estimates, lenders stand to lose an average of about $50,000 to $80,000 per foreclosure. A loan modification does not wipe out a lender’s profit. To the contrary, it helps lenders avoid taking a huge loss on foreclosure while at the same time allowing them to keep a performing asset on their books. As a result of a loan modification, the lender keeps collecting interest. The loan remains profitable, albeit less profitable than it would have been had the homeowner been able to afford the originally agreed-upon payments, but still profitable. So why are taxpayers going to subsidize lenders?

Last Sunday (February 15, 2009) 60 Minutes ran a segment entitled “World of Trouble,” in which investigative reporter Scott Pelley interviewed Paul Bishop, a former loan originator for World Savings Bank which, at the time, was the second largest savings and loan. Bishop reported witnessing rampant fraud throughout the organization in the origination and approval of mortgage loan. And as I have been reporting over the past two years, what was going on at World Savings Bank was the rule rather than the exception in the mortgage lending industry. Everyone knew what was going on. The few people who tried to stop it were silenced and either demoted or fired.

Mortgage lenders were well aware that they were approving mortgage loans that never should have been approved in the first place. Loan originators and banks were raking in profits leading up to the mortgage meltdown, and they weren’t exactly spreading the wealth to American taxpayers. Now that the time has come for them to pay the price for irresponsible lending practices, they are calling on the American taxpayer to subsidize their losses? This is absurd.

Don’t get me wrong. I applaud President Obama for focusing efforts on bringing relief to Main Street, but the government shouldn’t be using Main Street money to do it. I think a more prudent move would be in the form of an executive order demanding that banks modify loans to a level of affordability and end foreclosures until they have cleaned up the mess that they themselves have contributed so much to creating.

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

Suppose you’re behind on your house payments. You dial the phone number on your most recent mortgage statement, clear the usual hurdles, and finally reach someone who understands your situation and offers to help. You are one of the lucky homeowners who has a cooperative lender. Now what? What can you do to team up with your lender to optimize the outcome? This blog post reveals ten ways you can expedite the process and negotiate an affordable loan modification that enables you to catch up on any missed payments, lower your monthly mortgage payment, and keep your house.

The following 10 tips apply whether you are working directly with your lender or teaming up with an attorney, law firm, or other professional you hired to represent your interest. If you hired professional representation, team up with your representative and defer all correspondence and phone calls from your lender to your representative – don’t communicate with your lender unless your representative specifically advises you otherwise.

1. Come clean – honesty is the best policy

It can be tempting to bend the truth when you are trying to convince a lender to approve a loan modification. Some homeowners are embarrassed by something they did to place their finances in jeopardy – possibly a gambling addiction of substance abuse. Others try to fudge the numbers to make themselves eligible for a loan modification they cannot otherwise qualify for. Even worse, some homeowners lie to their partners or try to conceal the problem until it is too late to do anything about it.

Only by laying all your cards on the table and disclosing the truth can you begin to attend to the root cause of your financial hardship and then develop and implement solutions that put you back on the path to long-term financial health.

2. Understand your lender’s point of view

Regardless of how you ended up in the situation you’re in, blaming the lender or the mortgage broker or loan officer who placed you in your current mortgage does little good, unless you can prove your point in court. Usually, you have a better chance of resolving the problem by understanding your lender’s point of view, even if you don’t agree with it. So, what is the lender’s point of view?

Lenders lack any emotional attachment to the situation. To them, it all boils down to money. If you can show them that modifying your loan cost them less than a foreclosure and they believe you will honor the terms of the loan modification, they are likely to approve it. If not, then they are likely to reject it.

Keep in mind that some homeowners who don’t need loan modifications are also applying for them. Lenders need to protect their own interests from homeowners who are trying to cheat them out of their profits. As a result, they need to carefully screen out ineligible applicants, which can often make the process much more difficult and frustrating for homeowners who genuinely suffer financial hardship and need a loan modification.

3. Keep a cool head

Understandably, homeowners often become frustrated and angry when seeking assistance from their lender. Unfortunately, anger can result in the following:

• “Accidental” disconnects: The customer service rep you’re speaking with may put you on hold permanently or hang up “accidentally.”
• Lost files: Your file may get “lost” or “misplaced.”
• Rejection: Your lender may decide that you are unreasonable and that foreclosing would be less costly overall.
• A bad offer: Your lender may offer a workout solution that is worse than what you would get had you been nice about it. Or, you may be so exhausted that you agree with the first offer your lender puts on the table rather than negotiating a better deal rationally.

Tip: If you doubt your own ability to remain calm, cool, and collected during the entire process, consider hiring a professional to represent you.

4. Give them what they need

Prior to applying for a loan modification, call your lender or visit its website to obtain an application packet or a list of items you need to submit with your application. Some lenders allow you to apply online, but you usually have to ship or fax supporting documentation separately.

Find out exactly which forms you need to fill out and which documents your lender needs to process your application, and provide everything to your lender or representative in the manner specified. Label everything clearly and legibly with your name and loan number and provide a checklist of all items you’re submitting in your application packet. Arrange the items in the order listed by your lender, so whoever is processing your application does not have to search for items. Include a cover page that in large print lists your name and loan number as well as an items-included list.

5. Ask for what you want

Before discussing the terms of the loan modification with your lender, you should have a fairly clear idea of what you want and need. Answer the following questions for yourself. This will help you field questions from your lender:

• How much do you owe in late or missed payments?
• Can you catch up the missed payments?
• Do you need additional time to catch up on missed payments?
• How much can you realistically afford to pay each month?
• Do you really want to keep your home or would you prefer to sell if you could walk away not owing anything?

State clearly what you want up front. If your lender is unwilling to agree to the terms you need, you’re better off knowing that up front, so you can explore other options. Don’t waffle – it will only lead to misunderstandings and unsatisfactory “solutions.”

6. Let them do their job

While you should track the process of your loan modification application and any negotiations, avoid the temptation to micromanage the process. Knowing the timeline in advance can help you develop realistic expectations of when you will hear back from someone, so you don’t have to keep calling to check progress. Remember, the more time they spend on the phone consoling anxious applicants, the less time they have to review your application and work out a solution.

The lender should have a timeline for just about every step in the process. Your lender can probably even tell you how many days it takes for items you fax in to get to where they need to be. Some lenders have a 4-day delivery period for faxed items. Most timelines are in place because of the volume of requests. Ask how long the steps in the process take. Follow up when timelines near expiration.

7. Get your financial house in order

Most homeowners, even those who can readily afford their monthly house payments, could benefit from reviewing their income and expenses and drawing up a monthly budget. If you don’t have some way of tracking income and expenses with realistic goals in mind, put a tracking system in place today and start developing a budget.

If you have a computer, a personal accounting program, such as Quicken or Microsoft Money can come in very handy. These programs allow you to assign each entry to a specific category, such as groceries, clothing, entertainment, utilities, auto insurance, auto: gas, auto: maintenance; and so on. You can then generate reports showing monthly totals for spending in each category.

If you’re budget challenged, consider hiring an accountant or credit counselor to get you on track. It’s worth the investment.

8. Keep everyone posted of any changes

If anything changes related to your financial situation, be sure to keep your representative or lender (if you’re negotiating the loan modification on your own) in the loop. Withholding information that may affect your eligibility could cause problems.

9. Make sure the lender’s offer is truly affordable

Assuming you qualify for a loan modification, your lender will present you with an offer. Be sure to review the offer carefully and have your attorney look it over – before you sign on the dotted line. Make sure the monthly payment is truly affordable. If the loan modification is unaffordable or makes your budget so tight that you’re only one car repair or medical bill away from defaulting again, head back to the negotiating table to try to work out a better deal. It doesn’t do you or your lender any good to accept an agreement that puts you on the path to repeating this same scenario.

10. Hold up your end of the bargain

By the time you finalize your agreement, you and your lender will have invested a great deal of time and effort in hammering out the details. To ensure long-term success, put some effort into keeping your budget on track. If you are having trouble, consult a credit counselor, who can help hold you accountable for your spending. Budgeting can be tough at first, but it pays huge dividends down the road. Most people who acquire the necessary skills discover that by tweaking their spending priorities they have more than enough to cover their expenses.

The key to success is discipline and commitment. All the effort you spend setting up a plan is of no use if you don’t follow the plan you created. It’s like signing up for a gym membership and then never walking through the doors to work out. Reestablishing your financial health will be work, but the results will be worth the effort. Like that gym membership, you won’t realize results over night, but commitment to the routine will pay off.

Remember, loan modification success is a team effort. Do your part to achieve long-term success.

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

United States Congressman John Conyers—a Democrat from Michigan who serves as chairman of the House Judiciary Committee—says loan modification can help stop stem the tide of foreclosures. From today’s Wall Street Journal:

This week the House Judiciary Committee approved legislation aimed at helping Americans keep their homes through bankruptcy.

I introduced the Helping Families Save Their Homes In Bankruptcy Act of 2009 to give courts the power to modify mortgages to bring them in line with underlying home values. For families in distress, this is a much-needed reform. And considering the realistic alternatives, it is fair to all concerned.

I have been working on this bill for nearly two years. I believe it represents one of the most tangible and productive steps we can take to limit the fallout from the real-estate depression that has been sweeping the nation. While it is not the entire answer to the economic crisis, it is a common-sense and practical approach to stopping a downward spiral where foreclosures also depress nearby home values and thereby hurt other homeowners. This spiral is not helping anyone — not homeowners, not lenders, and certainly not communities.

Some argue that we are acting too quickly, and that we should delay my legislation to give homeowners and lenders more time to modify the terms of existing mortgages on a voluntary basis outside of bankruptcy.

But the evidence shows that such modifications don’t work. For one thing, many of the servicers who control the mortgage loans claim they are not legally permitted to agree to voluntary modifications. And even when they are legally permitted to agree, their financial incentives are stacked in the direction of foreclosure.

As a result, the much-vaunted federal “Hope for Homeowners” program launched in October has been only a limited success. The program is supposed to facilitate new mortgages for homeowners if lenders agree to reduce the amount of money owed on a home to 90% of its assessed value. The program went into effect with the goal of helping hundreds of thousands of homeowners. To date, it has processed less than 400 applications.

To those who claim that my bill will end up harming consumers by increasing the cost of credit, I would respectfully suggest that they are not taking account of the track record of the modern-day bankruptcy code.

For more than three decades, the bankruptcy code has permitted the very kind of court modification we are considering today, for every other form of secured debt, including loans secured by second homes, investment properties, luxury yachts, and jets. For over 20 years, this very kind of modification has been available for home mortgages already — if the home is a family farm. There is no indication that this has in any way increased the cost of credit for any of these kinds of loans.

As for my legislation, we have narrowed it to apply only to existing mortgages. So it will have no effect on new mortgages and cannot impact their cost. This is one reason why Citigroup is now among the many business and consumer groups that support this proposal. It’s also one reason why the Obama administration supports my bill.

Finally, to those who argue that this legislation constitutes some form of “moral hazard,” which will encourage reckless borrowing in the future, I would simply ask them to come to Detroit, my home town.

Detroit has had more than 100,000 foreclosures over the past three years. And the pace doesn’t seem to be letting up. The city has an average of 126 foreclosures a day. Block after block, “for sale” and foreclosure signs feed off of each other, driving down home values, uprooting families, decimating communities, and causing local tax revenue that pays for police and firefighters to plummet. We don’t have the luxury of worrying about hypothetical future moral lessons. We need to stop the bleeding today.

What is happening in Detroit is also happening across the country. Communities in Arizona, California, Florida, Massachusetts, Nevada, Ohio and elsewhere are all facing big foreclosure problems.

If we can spend $700 billion to bail out the brokers on Wall Street, the very least we can do is allow working Americans who are willing to repay their debts as best they can, under court supervision, the dignity of staying in their homes. With one in 10 homeowners behind on their mortgages, and 10 million foreclosures expected over the next several years, the time for meaningful action is now.

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

Over the past year or so, the American homeowner has taken it on the chin-a one-two-three punch that has knocked many out of their homes and threatens to do the same to millions more. First, the housing bubble burst, stripping billions in equity. Tight credit landed the next blow, preventing homeowners from refinancing their way out of trouble. Finally, a severe economic downturn has led to record job losses, making it difficult or impossible for many families to keep their homes even if they otherwise would be able to negotiate a loan modification with their lender.

If American homeowners weren’t down for the count just yet, some of their fellow citizens are lining up to stomp them into the dirt. These folks, no doubt consisting of those who have been fortunate enough to dodge the foreclosure bullet so far, are calling for the end of the bailouts-specifically for the end of any bailouts for homeowners. These are the people who post comments on blogs and discussion forums every day claiming that homeowners who are drowning in debt shouldn’t be “rewarded” with special deals.

What most of those who are clamoring for an end to homeowner bailouts, such as loan modifications, fail to realize is that we are all in this together. What’s good for homeowners is good for America.

Here’s why:

• Foreclosures reduce property values for everyone in the neighborhood.
• Lower property values usually mean states, counties, and towns have less money to fund education and other services.
• Lower property values also lead to lower commissions for real estate agents and less business for everyone who makes a living off of the real estate industry.
• Foreclosures leave vacant homes that tend to attract vandals, vagrants, and other criminal types who either set up shop in the homes or use the homes to commit real estate or mortgage fraud.
• Rising default rates convince lenders to tighten credit, making it more difficult and costly to borrow money.
• As families lose their homes, they have less money to spend on products and services, lowering demand and increasing unemployment.
• The mass exodus of families from an area destabilizes the neighborhood, often attracting transient (just passing through) populations. This makes it difficult for schools and other township agencies to plan for development.

Foreclosures feed on foreclosures as the repercussions from one foreclosure ripple through the economy.

Don’t be fooled-when a family loses its home, everyone in the neighborhood becomes a victim of foreclosure. This is why it is so important for us to work together, as Americans have traditionally done in the face of crises, to stem the tide of foreclosures and stabilize the housing market. We need to stop worrying about homeowners who have gotten breaks that seem unfair and begin to realize that we have a lot more to lose if homeowners across America are not given the breaks they need.

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

Earlier this week, I released my Top 5 Do’s and Don’ts when considering Loan Modification:

#1. Do tell your spouse or significant other: It’s tempting to hide bad news from your partner, but this can actually work against you. For example, in most cases, you cannot legally negotiate a loan modification without your spouse. You and your partner are in this together and are stronger as a team. Regardless of the reason, disclose it to your partner, put it behind you, and work together to resolve the crisis.

#2. Don’t assume it’s too late to act: As long as you are still residing in your home, you have opportunities to keep your home. 

#3. Do realize that your lender wants to resolve the issue: The only way your lender makes money is if their loans perform—modifying a loan through loan modification makes it perform for the lender. Banks and other lending institutions make more money and lose less money if you can make your payments. When they foreclose, they not only lose your monthly payments, they also have the expense of foreclosing (attorney fees), rehabbing the home, and then selling it (agent commissions).

#4. Don’t go into hiding: As hard as it is, failing to pick up the phone, return phone calls, or respond to notices is one of the worst things you can do. Your lender needs to know from you or your legal representative that you are aware of the delinquent payments and are working on a solution. 

#5. Do seek professional representation: You may be able to negotiate a loan modification yourself by working directly with your lender, but an experienced attorney or loan modification expert can properly represent your case to your lender and make sure your loan is modified to a level of affordability. Homeowners who represent themselves often overestimate what they can afford to pay and end up in the same situation months after they receive their modification. Working with an attorney helps you reduce the likelihood of making the same mistake twice.

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