I can’t think of any subject that has been so widely and frequently discussed and studied, over such a long period of time, by such a large number of experts and observers, who continually espouse such a diverse range of opinions and cite such a large number of conflicting facts, that is still so misunderstood… or understood differently by different people… or in short, is such a mess… that affects so many people… and is so important to our government and our economy… yet remains pretty much unsolvable… AS LOAN MODIFICATIONS.

See… loan modifications today represent such a complex subject that even writing a sentence describing the situation surrounding them, such as the one above, was a pain in the neck.

Let’s start with the questions on everyone’s mind… Why aren’t more loans getting modified?  Why is it so difficult to get the bank to modify a mortgage?  Why are trial modifications ending in foreclosure?  Why is it that people are consistently treated so poorly by the banks?  Is it the investors that are making it hard to get a loan modification?  Is the government doing enough to get banks to modify loans?  And should people hire an attorney to help them obtain a loan modification, or go it alone?  That’s at least a pretty good start, right?

I think the fundamental thing that almost no one understands involves how a bank views a borrower’s request for a loan modification.  Lot’s of people, including me in past articles, have said that banks simply don’t want to modify mortgages.  Lot’s of people, including me, have also pointed out that servicers make more money by foreclosing than modifying loans.

All of those points apply in certain circumstances, but they’re also beside the point to some degree.

A Banker’s View…

Your bank views you calling to request that your mortgage be modified as the beginning of a process.  Maybe you truly need and deserve a loan modification, but maybe not.  The only way the bank will be able to tell one way or the other is by putting you through that process, and it’s not a pleasant process in the least.

Let’s say that you’re someone that has good credit, you’ve never missed a payment, and now are saying that you need your loan modified or you may lose your home to foreclosure.  When you call your bank to ask about a loan modification, they’re going to tell you that they can’t talk to you until your payment is delinquent by at least 30 days.

You hang up the phone.  You’re disappointed.  And you now have your first decision to make: Do you let your credit score get trashed by going 30 days late on your mortgage?  It’s not an easy decision.  Once you head down that path it’ll be years before your credit score is back up where it’s always been, and if you need your credit to be good for other reasons, chances are you’ll decide that you no longer want a loan modification because the cost of trying to get one… sacrificing your credit score… is too high.

The bank’s process has just saved the bank quite a bit of money.  Had the bank agreed to modify your loan, it would have been like throwing money away unnecessarily because you kept making your payments without them having to modify your loan.

Now, let’s say that you decide to go 30 days delinquent on your mortgage.  You call back, now 30 days late, but now your bank tells you that you have to be 90 days late before you can be transferred to a negotiator.  You hang up the phone.  Again, you’re disappointed.  Do you go 90 days late, or do you bring your loan current and forget the whole thing?  Some bring their loans current, others don’t.

If you don’t bring your loan back to current status, you’re about to start receiving a series of letters and phone calls designed to make you feel ashamed, guilty and scared.  And those letters will come more and more frequently, and they’ll be written using stronger and stronger terms.  And chances are you’ll feel worse and worse as time goes by.

Then in 90 days, assuming you’ve gone the distance, you call the bank again.  This time they’ll tell you that your credit score is now too low to qualify for a loan modification.  Now you’re enraged.  You stomp your feet.  And then, if there’s anyway you can do it, chances are you bring your loan current and try to forget the whole idea of a loan modification.  Maybe you get rid of a car payment to do it, maybe you rent out a room or take on a part-time job to generate the extra income you need, or maybe you borrow the money from a relative.

You never even bring up the whole experience to your friends or family members because you’re ashamed that it even happened.  You’re ashamed that you were having trouble making the mortgage payment that you signed up for, and you’re ashamed about having gone 90 days late on your mortgage payment and almost losing your home.  The whole thing becomes one of those skeletons that you hope will soon fade away in your closet of memories.

Besides, what would your friends or family members even say if you did tell them?  Do you think they’d be on your side and angry at the way your bank treated you?  Or would they take the view that the bank had every right to handle your situation the way they did, because after all, you signed the mortgage and agreed to make the payments… the bank has no obligation to lower your payment just because you having trouble making it.  You’re lucky the bank didn’t foreclose, in the eyes of your friends or family members.

Oh, and one or two more things, while we’re at it… maybe you should have opted for a little less house and not gone quite so far out on a limb… maybe you should have spent a little less on your car too, and not used your credit cards for all those nice clothes you wear… maybe you’re just living way beyond your means.  You’re probably not saving for retirement either.  You’re one of THOSE irresponsible people and maybe losing your home to foreclosure would teach you a lesson.

Whew… it’s exhausting, isn’t it?

But, let’s say for a moment that you could not find a way to bring your mortgage payment current when told, when you were 90 days delinquent, that your score was now too low to qualify for a modification.  Now you’re 120 days behind, and soon it’s been six months since you’ve made a payment to your bank on your loan.

By now the bank is sending you the most threatening letters imaginable.  They could foreclose at any moment according to the letters, and their tone tells you that you are basically an irresponsible failure who cannot be trusted because your word means nothing.  You promised to make the payment and now you’re not living up to that promise.  You’re a promise breaker… a liar.  How do you sleep at night?  You shouldn’t even have friends, because if your friends knew what you were up to, they likely wouldn’t want to be your friend anymore.

Nonetheless, you’re now seven months late, then eight, and then nine.  Now the bank is calling you almost daily, the pressure is becoming unbearable, you’re trying everything to make more money so that you can make the payment.  If you do find a way to come up with the cash, you bring your mortgage payment current immediately.  If you get a new job that pays more, you call your bank and start begging and explaining that everything is going to be okay… you’re working again… if they’d just please understand… you’re a good person… you’ll pay your payment every month and on time from now on… you’re sooooo sorry to have gotten behind… How about $1200 this week, and then $1200 the following week, and then $2000 by the end of the… blah, blah, blah.

You’re a babbling fool that will agree to just about anything the bank says at that moment.  If the person you’re talking to at the bank acts the slightest bit nice to you, or comes off as even a little bit understanding of your situation… you gush with appreciation and feel like you want to be their BFF.   Thank you, thank you, thank you, thank you, thank you, thank you… really… thank you so much.  My husband thanks you, my children thank you… my dog thanks you.  Yuck.  It’s disgusting, really.

Or, maybe that’s not what happens.  And now you’re almost eleven months late.  You’re working.  You could make a reasonable payment if you weren’t so far behind.  You’ll never be able to pay off the arrears though, so what’s the point.  You’re desperate… you’re about to give up and resign yourself to the fact that you’re going to lose your home to foreclosure.  You’re trying to get used to the idea that you’ll soon be packing and calling the moving truck… its heart wrenching for anyone to watch.

Well, guess what?  Depending on the specifics of your situation… whether there’s any equity in your home… how far underwater you are… how long are homes like yours and in your area remaining on the market before being sold? Things like that.

Do you see what’s going on?

Since foreclosure is now imminent, the bank can’t threaten to ruin your credit score anymore, as it’s already ‘F’ and would be ‘G’ if scores went that low.  The bank is now trying to figure out two things:

1. What is the likelihood of you being able to make the payment if the bank modifies your loan?  What if they take the amount in arrears, tack it on to the back end of the loan, and reduce your monthly payment by a couple hundred a month?  Would that do it?  Or would you agree to the deal and then not be able to make the modified payment… and again in six months end up right back in foreclosure where you are now.

If the bank thinks that might happen, they won’t modify your loan.  They’d rather foreclose now than go through this same thing next year and end up foreclosing then.  Real estate values will likely be lower next year, so by waiting the bank just assures itself of a bigger loss on the property.

The cost of foreclosure to your bank is going to be 30% to 50%, or even more in the worst of instances.  But that’s not the most important factor to your bank… this is all about your bank’s degree of certainty that if they modify your loan, you won’t be back in foreclosure anytime soon, and likely never.  Your bank views a loan modification as pretty close to unthinkable in the first place, so it’s unquestionable that it’s a once in a lifetime thing in their eyes.  You should be too embarrassed to even ask a bank to modify a loan a second time, according to your bank.  It’s almost like… if that happens, you’ll probably want to change your name and move to another state. What a load of crap the banks have peddled our way all these years.

So, you see… it’s a range.  In order to get your loan modified, you need to fall somewhere between “Definitely won’t default again if loan reasonably modified,” and “Will self-cure the mortgage before home is actually taken back by the bank”.  Get it?

I talk to people all the time that have recently applied for a loan modification, and they always talk to me about how it will cost the bank more to foreclose on their particular house, so they expect the bank to modify the loan.  But then the bank refuses, and I hear people say that they can’t understand it because the bank should do what’s in the best interests of investors.  Then we start talking about how servicers make more money foreclosing, all of which is true.

The problem with this line of thinking, however, is that it fails to incorporate all the data… it’s not just a numbers game to the bank.  First they need to know, if they offer you nothing, will you really end up losing the home to foreclosure, or will you let the Devil himself rent out a room to avoid that shameful outcome?  Then they need to know that if they do accommodate you and provide you with a modification, chances are good that you’ll never miss a payment for the rest of your life.

Shame, shame, shame…

So, how should a bank go about getting the answer to either or both of those key questions?  Self-cure and/or re-default?  It’s not like you can find the answer to either of those questions from looking at an application or a credit report.  You certainly can’t tell by talking to someone on the phone.

The only way a bank can know for sure whether you’re going to self-cure and eject yourself from the foreclosure process, is to let you get to that point and see what you do.

It’s like a game of poker… will you fold under extreme stress and pressure and show up with the money to save your home, or will the bank actually be forced to foreclose, and therefore better off to modify your loan… and if they do approve your “mod,” as they say in the biz, will you make it just fine for a long, long time, or will you end up right back where you are today, next year at this time, if not sooner?

Once a bank knows the answer to those two questions about you, then the bank’s cost comparison between modification and foreclosure becomes pivotal, but until then, chances are the bank will play out its inherently superior hand and count on you folding your cards before foreclosure by coming up with the money you said you could not possibly come up with when you were talking with your bank’s representative about a loan modification.

I talked to a woman a few days ago, she said she was in her early sixties, said she owned two homes, desperately needed at least one loan modified and probably both, otherwise she’s going to be on the street.  She wanted me to recommend a few attorneys for her to talk to, and I gave her the contact information for the lawyers I knew in reasonably close proximity to her home.  Then she asked me a few questions, and the last one I’ll always remember.  Referring to the lawyer, she said:

“Do you think I have to tell him about my trust account?”  (Adorable, right?)

I answered as honestly as I could.  I said: “I wouldn’t.”  (It’s probably not the right answer, I realize, but I’m just saying…)

If this were a tennis match, the score would always read: Advantage – Banks & Servicers

The reason that, other things being equal, I advise people to hire an attorney to help them negotiate a loan modification is that their lender or servicer will ALWAYS have a huge built in advantage in any negotiation over the settlement of a debt you contracted to repay, because the moral norms for borrowers work against them, and the market norms that apply to banks, support the bank doing pretty much whatever it thinks it needs to do to get the borrower into compliance with the terms of his or her loan… or reclaim the property.

Even when people hear that a bank did something really egregious or even illegal, many of them just say: “Yeah, well, I guess that can happen.”  It’s as if to say that perhaps the bank went too far, but the borrowers were juggling flaming chainsaws in terms of risk, and the bank still has the right to take back its home and punish the irresponsible homeowner who fell outside of our society’s norms by failing to fulfill his or her promise to repay a debt.

See, there are some things in our society that work the way they do only because we believe they will work the way they do.  The FDIC, or Federal Deposit Insurance Corporation, is a commonly offered example of this principle at work.  The FDIC “guarantees” cash deposits up to $250,000 per account, as of last year, I believe.  So, no one has to worry about rushing down to the bank to get their money out if there’s a problem at the bank, the FDIC will cover any loss up to $250,000 per account.

Except, even in the best of times, the FDIC could not possibly come up with the money to cover even a small fraction of bank deposits in this country.  If there ever were a disaster that caused all the banks to fail, the FDIC would be meaningless.  The FDIC is an independent agency of the federal government and you might call it a “faith based” organization because it only exists to give us faith in our banking system, and only works as intended because of that faith.

Well, loan modification negotiations are a little bit like that.  The bank gets to use shame, guilt and fear to get you into compliance with your loan.  Once you’re deeply ashamed, you won’t tell anyone what’s going on… and you’ll feel worse every day.  Then you become afraid to answer the phone.  Then you’re turning off the machine… you won’t even want to hear the phone ring.

Your bank will also greatly exaggerate what it will cost you to lose your property to foreclosure.  You’ll be told that you won’t be able to buy anything for a decade, and all kinds of other nonsense.  By the time you’re done reading a few of the letters you get from your lender each week, you can easily become convinced that losing your home is almost the end of all opportunity in your life.  Might as well be a bum after that.  It’s absurd of course… you can buy another home in 2-3 years, if that’s even what you want to do.  There’ll be so many foreclosures on the market… you’re going to be hearing about foreclosures selling ten years from now.

The Point Is…

The point is, that when homeowners start the process of negotiating with their lender, they’re not only subject to being made to feel guilty and ashamed, but they are also likely to over-estimate the personal cost of foreclosure, all as a result of the bank’s and our society’s intentional efforts to make borrowers feel that way.  It’s no accident, is what I’m trying to say.

You see, we keep the banks open and safe by believing in the FDIC, and we keep people from walking away from their homes when the value of those homes drops significantly by imposing our society’s moral norms, which include shame, guilt and fear, related to repaying debts.  If the government and the banks can make homeowners deeply ashamed and afraid to lose their homes, then fewer people will even ever ask for a modification in the first place.  With me?

Why the Bank Doesn’t Want You to Hire a Lawyer or other Expert…

When a homeowner hires an attorney to help negotiate a loan modification, that attorney is not going to being made to feel ashamed, guilty, or afraid… the borrower can be made to feel all of those things and more, but the lawyer, not so much.  He or she is a hired gun, if you will.  That’s why the banks don’t want homeowners to be represented, and why they want homeowners to call them directly.

Treasury looks the other way on this “put-the-borrower-through-hell” process because it understands that banks have to make sure that they are not throwing away money by modifying loans for borrowers who would have self-cured.  Nor does the government want the banks to modify loans for people who won’t be able to make the modified payment.  And since the only way for the bank to really know either of those things is to put the borrowers through their paces, as it were.  Many will self-cure, some should be foreclosed upon… blend, shake, stir and pour,,, see what comes out.  And of those that fall somewhere in the middle, some will have more or less equity, and some will be in markets where houses are selling relatively faster than others.

Out of that psycho-social-financial-market analysis, the bank will modify some loans… but the process used to conduct the so-called analysis is guaranteed to frustrate the hell out of everyone who enters it that’s determined to obtain a loan modification.

Being represented by an attorney or other expert throughout the process is unquestionably better than not being represented, mostly because that attorney won’t be subject to the bank’s tactics of trying to shame, guilt or scare, and as a result of that, is likely to think more clearly than you would be able to.  And also because of the attorney’s or other expert’s knowledge of the law related to the foreclosure process and the HAMP guidelines, that attorney is more likely to get a result that’s acceptable to you, the homeowner… and by acceptable, I mean a modification that’s sustainable over time.

Is This How Things Should Be Done Today?

Absolutely not.  The situation we’re in today is NOT a normal market correction, and I thought I’d better make it clear how I feel about how the banks are handling loan modifications: I hate everything about it, and I think it could not be more wrong.  The Obama Administration has continued our government’s tradition of implementing pointless programs designed to help stop the foreclosure crisis.  Nothing our government has done has helped in the least… they’ve failed us at every turn.

It’s not today’s homeowners that are responsible for the position in which they find themselves… no matter what anyone tells you… it is NOT your fault.  If someone would like to debate that point with me, bring it.  I’m easy to find and can be emailed at mandelman@mac.com.  But come to the discussion prepared, because I am.

This meltdown was caused by this country’s financial institutions, and not by people with mediocre credit scores who wanted to buy houses.  It’s the banks that did this, but no one is making them do anything to fix what they’ve clearly broken.

We’ve given the banks in this country something like $11 TRILLION so far, and we’re going to have to give them a lot more.  The so-called toxic assets are still right where they were last fall, and the banks that were too big to fail last year, are now bigger.  They have an obligation to act in the best interests of the homeowners they screwed, and in the best interests of our nation’s economy because without American taxpayers, they wouldn’t even be open for business.

So, don’t read what I’ve written and come away thinking that I approve of the way banks view borrowers asking for loan modifications… I don’t.  I’ve only written what you’ve just read because I think it’s important that people understand the dynamics of what’s going on… that the reason they feel guilty and ashamed is because the banks and our government want them to feel that way, so that people don’t just start walking away from their mortgages because they’re so far underwater.

They’re manipulating you into feeling ashamed for being in trouble on your mortgage… but don’t let them make you feel that way.  It’s not your fault… it’s the banks that wear the black hats in this horror movie, make no mistake about that.

And, in the event that you’ve already lost a home to foreclosure, don’t believe the crap about how your life will be ruined for another ten years.  It’s simply not true.  You may not be able to buy another house for the next few years, but so what?  We haven’t come close to hitting bottom, so you wouldn’t want to buy another home in the near future anyway.

All forecasts say that we’ll have 12 million more foreclosures in the next two years, and that number is probably low, so don’t feel alone and ashamed about your situation.  The people you’re talking to down the street have problems too, they’re just too ashamed to tell anyone about their situation, just like you’ve been afraid to talk about yours.

Let it go… and let’s turn up the heat on exposing what the banks have done and continue to do.  Next year the mid-term elections will mean that every single representative in the House is up for re-election.  Let’s just see if we can’t send a message they’ll hear and listen to… I’m sure we can, if we want to.

It’s not over until it’s over.  Don’t give up the fight.  Knowledge is power.  As Winston Churchill once said:

“Never give up.  Never give up.  Never.  Never.  Never.”