Every week, I speak to homeowners who are behind on their mortgages and who are trying to decide between two options – a mortgage modification and Chapter 13 bankruptcy.
In a perfect world, a mortgage modification is a better choice. If your home’s value has fallen – as many have – and your mortgage company will voluntarily (1) reduce the principal balance, (2) forgive or defer missed payments and (3) reduce the monthly mortgage payment, you would have incentive to fight to save your home. At the same time, your mortgage company would now have a “performing” mortgage on its books along with the goodwill of a customer.
The federal government has even offered mortgage companies significant financial incentives to help struggling homeowners – the HAMP (Home Affordable Mortgage Program) – which was introduced several years ago.
For a variety of reasons, however, mortgage companies have been reluctant to enter into modifications with homeowners. Less than 10% of HAMP applicants have been approved. Further, my clients tell me that mortgage companies make it extremely difficult to complete a modification application:
- lenders seem to “lose” application packets regularly – some of my clients tell me that they have sent in documents, tax returns and income/expense information three, four even five times
- lenders have not been responsive – I have seen several instances where the lender starts foreclosure proceedings while processing modification applications. The lender representative keeps asking for more information as the foreclosure date looms. A decision may not come until the Thursday or Friday before “foreclosure Tuesday” and if the modification application is denied, it can be too late to get a credit counseling certificate and find a lawyer to file a Chapter 13
- lenders base modification decisions on statistical analysis rather than case by case review. I recently spoke to a gentlemen who is trying to modify a home that lies within a certain zip code. His particular house is less valuable than other similarly sized homes within that zip code but the lender insists on using a zip code average valuation that is tens of thousands of dollars higher than his actual home value. The lender will not concede that his house has lost significant value.
How to Protect Yourself When You Apply for a Mortgage Modification
Despite the disheartening news on the mortgage modification front, I still encourage those clients who want to try for a modification to apply. If successful, they can avoid bankruptcy – at least for the time being. I further advise those clients not to assume good faith or any likelihood of success. For those whose homes have been scheduled for foreclosure, I recommend that they pursue both modification and Chapter 13 at the same time.
If you have received a foreclosure notice and are also considering a modification this means that you should retain bankruptcy counsel and start preparing for a Chapter 13 filing. You should decide on a deadline for a modification approval – perhaps 5 to 10 days prior to the foreclosure date. If you have not received a decision by that deadline, go ahead and file the Chapter 13.