Borrowers who want to modify their mortgages should understand that just getting the preliminary modification is not enough. They still need to get finalized, which requires more paperwork after a three month trial period. The process involves a lot of very confusing paperwork. Clients have come to us after they tried to negotiate a mortgage modification only to end up increasing their monthly payments, or have their payments go towards the banks’ attorneys fees.

A borrower facing foreclosure should consult with an experienced attorney to see if a modification may present a viable option for them. We are based in New York City, and have experience in mortgage modifications. We joked that we were responsible for more than 1% of permanent mortgage modifications approved by Bank of America, because one of our clients was approved around the time BOFA announced that it had only approved 98 permanently modifications nationwide. Of course, past performance is not a guarantee of future results. Nevertheless, we would be happy to provide you with a free consultation. Mortgage modifications are not suitable for every distressed borrower, but we can help you with your options.

Let’s take Joe the Plumber as our first example. Joe has a $2,500 monthly mortgage payment. Recently, however, Joe has been falling behind due to one of many reasons that have befallen us during this dire economy. Seemingly without warning, Joe misses his first payment.  He then misses another payment.  Judiciously, he seeks help and is able to work out a modification that will lower his monthly payment to $1,750 a month and wipe out his arrearages. You might think Joe is lucky. I would say Joe isn’t lucky, rather he is proactive. He understood his situation early, sought help and realized banks are more than willing to keep folks in their homes.

Now let’s take Jane the Occupational Therapist. Jane also has a $2,500 monthly mortgage payment. She too has fallen on hard times. Unfortunately, Jane is not as diligent as Joe and she waits 5 months before she seeks help, only after getting a notice of foreclosure from big bad bank’s attorneys. She too is able to work out a loan modification that will lower her payments to $1,750 and wipe arrearages. Wait! It seems waiting is the key. Not only did Jane save $7,500 more than Joe by not making three payments, she got to sit there and do nothing for 3 additional months?! Did I forget to mention that there was a foreclosure action on her? Did I also forget to mention that the banks were unwilling to speak to her because she was 5 months late and in foreclosure already? How much did she spend to not only get the modification but also fight the foreclosure action? Jane might not have been ahead of Joe after all!

Now let’s take Jack the Ripper. Like Joe and Jane, Jack also has a $2,500 monthly mortgage payment and has fallen on difficult times. Jack is so down on himself, he waits 9 months to seek help only after the bank’s attorneys send him a notice of sale. Jack is up in arms. He doesn’t want to lose his home, but he is 9 months behind, surely there is no remedy for Jack situation!? Luckily Jack calls his attorney, who tells him he has options up until the property is sold (and sometimes even immediately after). Bankruptcy! Bankruptcy? How is that going to help? Well, when you file a Chapter 13 the court issues an order (called the Order for Relief) that includes something not well-known – the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending–typically for three to four months. Oh and by the way, this will help protect against other creditors too. However, there are exceptions to this general rule that I will mention in a parenthetical but not get into now (lender can file a motion to lift the stay). Chapter 13 bankruptcy lets you pay off the “arrearage” over the length of a repayment plan you propose–five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home. But wait there’s more:  Chapter 13 may also help you eliminate the payments on your second or third mortgage too. If your first mortgage principal is greater than the value of your home, you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt–which, under Chapter 13, takes last priority and assuming you stick to your repayment plan may not have to be paid back at all. Jack is sure one lucky guy! But did I mention that bankruptcies stay on your credit report for years! And did I mention all the fees fees Jack racked up filing for bankruptcy?

So what’s the moral of the story? First, don’t sit on your hands. Being proactive is essential to successfully dealing with bad situations. Call an attorney with experience in all facets of home retention. A good attorney will know what to do in every situation. Loan modification might be the best remedy, but not in all cases. Lowering principal balances on 2^nd and 3^rd mortgages might be the best remedy, but not in all cases. Ask questions, get answers and most importantly, be proactive.

On October 9, 2009, the federal bankruptcy court in the Southern District of New York wiped out a $461,263 mortgage on a debtor’s house after the bank could not prove that it had the right to collect the mortgage. The debtor refinanced a home loan with Mortgage World Banks, Inc. but fell behind. She filed Chapter 13 bankruptcy to restructure her debt. PHH Mortgage showed up at the bankruptcy proceedings as the servicer of the mortgage, which it claimed was held by US Bank. However, PHH could not show the paperwork demonstrating how US Bank ended up with a mortgage that was originally sold to Mortgage World Banks. Thus, the bankruptcy court threw the mortgage out.

However, the debtor still does not own clear title to the house, despite the bankruptcy ruling. There is a mortgage on her house, but it is uncertain who, if anyone, has the right to collect. Her attorney is considering a lawsuit to clear title. It may be the case that in the world of high finance, a house slipped between the cracks.

State courts have dismissed foreclosure cases where the purported creditor could not show it owned the mortgage. However, the recent ruling wiping out a mortgage is significant because the servicer lost the right to collect the debt due to the bankruptcy proceedings.

A borrower who is struggling with their residential mortgage should strongly consider a mortgage modification. The eligibility criteria are relatively simple. The terms of the government’s mortgage modification program are also straightforward.

In order to be eligible, the mortgage has to be for a primary residence, and must have been taken out before January 1, 2009. The principal balance on the principal mortgage must be equal to or less than $729,750. Furthermore, the monthly mortgage payments must be at least 31% of the borrower’s current gross income, which does not include taxes.

Most importantly, there has to be a reason that a homeowner needs help. Many Americans have lost their jobs or took severe pay cuts to keep their jobs. Decreased income makes a person eligible to take part in the Home Affordable Modification Program. Hardships such as high medical bills are also sufficient reason. Lastly, if a mortgage payment has gone up dramatically as part of an interest rate reset or a negative amortization mortgage, that would also be a sufficient reason to be eligible for the mortgage modification program.

However, eligibility is not enough to get a borrower qualified under the program. An eligible borrower needs to show that they would be able to continue making payments in the future if their mortgages were modified. If a borrower is not going to be able to make payments on even a dramatically reduced mortgage, the mortgage servicer has the right to reject his application and pursue foreclosure instead. That puts a borrower in a tough situation, because they need to be in trouble in order to participate in the program, but if they are in too much trouble, they cannot get qualified for a mortgage modification.

An important aspect to keep in mind is that there is no requirement for the borrower to actually have missed a payment before participating in the mortgage modification program. A proactive borrower can seek modification of their mortgage if they lost their jobs, or suffered some other event that makes them eligible for the program. Early intervention helps prevent the borrower’s financial situation from deteriorating to the point where he would have to miss a payment and risk foreclosure.

The Making Homes Affordable Program allows mortgage modifications that help borrowers who took out a mortgage for their primary residences, and who suddenly lost their jobs, or had their mortgage payments skyrocket, or who suffered hardships such as medical bills. There is no guarantee that everyone eligible for a modification will qualify. However, being proactive on the matter would help borrowers keep their homes.

The mortgage modification program strives to reduce a homeowner’s mortgage payments to 31% of their incomes. To this end, flexible interest rates may be fixed, the payment term may be extended, late fees may be waived, or the principal might be cut. In some instances, loans have been restructured into forty year loans at a 5% fixed rate.

A lawyer may be able to help negotiate a mortgage modification. Many documents need to be compiled, and a hardship letter has to be prepared. The mortgage modification law specifically allows lawyers to help negotiate modifications on behalf of homeowners. Homeowners struggling with their mortgage payments should be proactive in seeking a mortgage modication and repayment plan. One does not need to fall behind before applying. In fact, becoming seriously delinquent may prevent lenders from offering a modification at all.