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Loan modification and bankruptcy

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Atty. Paul M. Allen www.paulallenlaw.com

For bankruptcy attorneys, the loan modification roller coaster began on October 17th, 2008, when the US Department of Housing and Urban Development, also known as HUD issued instructions to their lenders to work with home owner Debtors filing bankruptcy, and to contact the Debtor’s attorney to offer a loan modification. HUD issued the following instructions to the mortgage industry:

“The Department was recently approached by the mortgage industry and bankruptcy experts regarding the Department’s current guidance on mortgagors in bankruptcy. As a result of these discussions, the Department understands that contact with debtor’s counsel or a bankruptcy trustee does not constitute a violation of the automatic stay and that waiting until a bankruptcy is discharged or dismissed before offering loss mitigation may be injurious to the interests of the borrower, the mortgagee and the FHA insurance funds.

Effective immediately, mortgagees must, upon receipt of notice of a bankruptcy filing, send information to debtor’s counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information. Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt. It is strongly recommended that the bankruptcy trustee be copied on all such communications. All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution.

Nothing in this mortgagee letter requires that mortgagees make direct contact with any borrower under bankruptcy protection. However, the information required to file a bankruptcy petition (now a matter of public record) will often include sufficient financial information for the mortgagee to properly evaluate the borrower’s eligibility for loss mitigation. Using this financial information, many mortgagees have been able to complete the loss mitigation evaluation before the bankruptcy plan is confirmed and have offered a pre-approved loan modification agreement. For those mortgagors that sought bankruptcy protection solely to avoid foreclosure of their homes, this solution allowed the mortgagor to have the bankruptcy dismissed and begin fresh with a mortgage obligation that is both current and with payments that the mortgagor can afford. For those mortgagors with other financial problems, the resolution of the mortgage problem will put them in a better position to resolve the remaining financial issues.”

This was really a very positive step in the right direction, because it recognized the hardship so many home owners were going through. It also legitimized the three pronged approach we have been pursuing, which is to discharge all unsecured debts like credit card debts, etc, to lien strip any secondary liens or mortgages in the property, and to modify the first mortgage, through a lowering of interest, usually fixed for several years, and a reduction of principle, which is  lowering the balance to fair market value, or even lower.

There are some law firms and brokers who are advocating suing the lenders for violation of the Truth in Lending Act, or other violations. They tell their clients that they can get the courts to order a rescission of the loan, and a repayment of all interest paid, (for loans financed during the last three years). The problem is that the borrower must also return all the money borrowed, within 20 days of the court order. If you borrowed $500,000, and your home is only worth $400,000, where do you get the money? Some lenders will not fight the case, they would prefer to return the interest, if they can get the entire loan paid back.

This approach simply doesn’t make any sense at all. Stay away from brokers and law firms who tell you that suing the bank will buy you time, and get you a house free and clear. It doesn’t work, and is very misleading.

Another recent option worth looking at, is the new Home Affordable Refinance Program (HARP) If you’re not behind on your mortgage payments but have been unable to get traditional refinancing because the value of your home has declined, you may be eligible to refinance through MHA’s Home Affordable Refinance Program (HARP). HARP is designed to help you get a new, more affordable, more stable mortgage. HARP refinance loans require a loan application and underwriting process, and refinance fees will apply.

You may be eligible for HARP if you meet all of the following criteria:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

While on the subject of negotiating with the banks on a possible loan modification, the Los Angeles Times, in a recent article reported, and I quote: “California lawmakers have passed legislation that would provide homeowners with some of the nation’s strongest protections from foreclosure and such aggressive bank practices as seizing a home while the owner is negotiating to lower mortgage payments.

After years of distress in the housing and mortgage markets, during which lenders seized nearly a million California houses, legislators Monday sent a pair of Assembly and Senate bills to Gov. Jerry Brown designed to help financially troubled borrowers stay in their homes. This law will be effective in January 2013”.  End of quote.

This law is obviously designed to make sure the bank is negotiating in good faith, and not just trying to collect non-refundable mortgage payments, while pursuing a trust deed sale anyway.

In the past, we frequently had to be ready with a bankruptcy filing, to thwart the real possibility that the bank’s trust deed sale was going forward, while negotiating with the bank’s loan modification department, that our client would send three months mortgage payments while waiting for a decision. Either the right hand didn’t know what the left hand was doing, or the banks were acting in bad faith.

For a comprehensive review of your financial situation, call the law Offices of Paul M. Allen. Consultations are free, but by appointment only. We have two offices to serve you. Glendale 818-552-4500 and Cerritos 562-865-4480.


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