Voluntary Loan Modification Programs Are Not Working

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    I. The Voluntary Loan Modification Programs Are Not Working

In preparation for NACBA’s 16th Annual Conference in May 2008 I surveyed both our legal plan attorneys and the members of NACBA to determine what was actually happening inside and outside of bankruptcy concerning loan modifications.

In early 2008 pressure had been mounting on mortgage companies to rewrite the loans not only to reflect economic reality but also to keep from adding to the volumes of foreclosed homes already on the market.

By May of 2008 our legal plan attorneys reported that in most cases lenders were offering forbearance agreements, with no changes in term, interest rate, principal reductions or changing the term of the loan. The terms of the forbearance agreements also varied greatly, from adding a few payments to the end of the loan to allowing an arrears to be paid over a period of time, perhaps as much as a year.

They also reported some very modest success in obtaining a meaningful modification, typically where a variable rate mortgage was converted to a 30 year fixed, arrears either waived or added to the end of the terms and a modest reduction in the principal balance.

However counterbalancing those cases were modification proposals that were unreasonable, such as one where the lender wanted upfront money before they would even process a loan modification. ($6000 in 5 days.)

I also surveyed the NACBA membership who reported similar results, though not even as encouraging. Specifically, they reported in early 2008 that:

  1. About 60% of the attorneys assisted with loan modification for clients, whether in or outside of bankruptcy.
  2. The vast majority of responders (68%) said that they obtained modifications in less than 10% of the cases.
  3. When they referred clients to mortgage counselors, virtually all of the clients came back. Again the vast majority responded (78%) that less than 10% of those clients received a modification through a mortgage counselor.
  4. Modifications on average took more than 4 weeks, and many of them took in excess of six weeks.
  5. In about 30% of the cases where a modification was available, the lender required that the bankruptcy be dismissed.
  6. In cases where the lender required dismissal of the bankruptcy, it caused almost 75% of those clients to reject the modification.
  7. Many modifications involved interest rate reductions, 75% of which were reduced by 4% or less.
  8. Interest rates for ARM’s were typically frozen for the life of the loan.
  9. In the few cases where principal was reduced, in 85% of the cases the reduction was for $30,000 or less.

By the summer of 2008 even those limited successes seemed to evaporate. Our legal plan attorneys reported that meaningful modifications seemed to grind to a halt. The initial problem with not being able to reach lenders continued. By the end of 2008 our bankruptcy filing rate increased and our percentage of Chapter 13 cases where we could save the home decreased.

In the last few days I re-surveyed the NACBA membership and my staff to see what experience they were having with loan modifications in late 2008 and early 2009.

The results are unchanged if not worse. My staff reported that effective modifications, typically involving a long term rate reduction and decrease in principal were nonexistent. In a few instances they were able to accomplish those modifications but only after initiating some kind of litigation proceeding, such as an objection to a claim, a forced modification in bankruptcy or an adversary proceeding alleging some kind of fraud in the transaction.

Read the full testimony at: House of Congress

Date published: Jan 22, 2009

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