Successfully obtaining a modification to your mortgage is usually a long and arduous task. Typically, the Lender won’t even talk to you unless you are significantly in arrears in your mortgage, often 90 days or more. That means that they will be suing you to foreclose your home at the same time you are trying to negotiate with them!

(Depending on the Lender) they will ask you for the same information time and again (because they have “lost it”), and not return your phone calls until it suits them. You will most likely talk to a different person each time you speak, likely someone who knows nothing about what was discussed before. It doesn’t sound very promising, does it?

Never the less, people successfully win modifications every day.

To understand this whole situation, you first need to know that there is currently NO program that requires the Lender to modify your mortgage. The Obama HAMP program (Home Affordable Mortgage Program, also known as “Making Homes Affordable”) is entirely voluntary for Lenders. That is all that Congress would pass. Any mandatory program was off the table before they even started. This is the cost we all pay for our political dysfunction as a nation (Remember, it didn’t used to take 60 votes in the Senate to pass legislation). The pols want every American to suffer so they can wrest control of the government.

Most modifications today are under the HAMP program. In and of itself, HAMP is an excellent deal for homeowners, depending on the deal the Lender is willing to enter into. The problem is, most people are underwater, so the Lender must reduce the total principal balance due on the mortgage to restore any equity to the homeowner, and they very seldom do this unless they are under a lot of pressure, such as what may occur if you aggressively defend their foreclosure attempts in Court, with competent attorneys truly focused on defeating them. Some lawyers defend these cases merely for delay, to give you time to short-sell your home or negotiate a deed-in-lieu settlement, which we do NOT recommend for almost anyone.

Here are the basic elements of the HAMP program (as originally intended):

Reduce the Total Principal Balance Due, to restore significant equity to the homeower;

Defer a portion of the remaining principal, that is, do not require the homeowner to pay interest on that portion, or make payments on it, but rather leave it as a “balloon payment” to be paid at the end of the natural life of the loan;

Amortize the remaining principal balance over the life of the loan (up to 30 years) at low interest rates, in steps as follows:

Initially, for 5 years, amortize at 2% interest
Year 6, increase the interest rate to 3% and re-amortize the payments
Year 7, increase the interest rate to 4% ” ” ” “
Year 8 and beyond, increase the interest rate to 4.45%, until that portion of the loan is paid off.

This clearly reduces the homeowners payments to stay in the home, and is a complete solution for many people, depending on the numbers involved (loan balance and total income).

However, if it doesn’t start out with a reduction of the principal, you will likely be underwater for the rest of your life, unless you sell the home in a short sale, taking NOTHING away from closing for yourself. In other words, your home is no longer a piggy-bank, it is an albatross.

NOW THERE IS HAMP-PRA: PRA stands for Principal Reduction Alternative. To qualify for this program, your mortgage balance must be at least 115% of your fair market value. Unfortunately, it does not (by it’s strict terms) apply to GSA (Government Sponsored Agency) loans, i.e., Fannie Mae, Freddy Mac or FHA mortgages. It’s also a strictly voluntary program, on the part of lenders. But it helps inch us in the direction of more and more pressure on lenders to reduce principal balances, and that’s a good thing.

Let’s be very clear about this: if the Lender doesn’t reduce the principal to below the fair market value of your home, you have no equity in your home, and you may NEVER have any equity. Any appreciation in the value of your home, over time, or due to capital improvements you make, doesn’t increase your equity, unless there is massive appreciation, depending on the TOTAL Principal Balance on your loan. In most cases, at the end of the life of your loan, YOU WILL OWE THE BANK MORE MONEY! You won’t have a “nest egg” to add to your retirement savings, you will have nothing but debt.

I think of this as a modern form of indentured servitude.

Instead of settling for this ridiculous treatment, we recommend the following:

1. Wait until you are sued for foreclosure;

2. AGGRESSIVELY defend, based on the actual flaws in the Lenders paperwork, demanding every document in the Lender’s possession, and force them to prove they have the right to sue you and are entitled to a judgment;

3. Put a portion of each mortgage payment you don’t make aside, to build your safety net;

4. After the Lender gets tired of being in Court, schedule a mediation (which is done at the Lender’s expense if your property is homesteaded);

5. At mediation, where you are accompanied by a skilled negotiator (your attorney) and is the FIRST TIME IN THE LIFE OF YOUR LOAN THAT YOU CAN ACTUALLY TALK TO A DECISION MAKER FROM THE BANK, demand a significant reduction in the principal balance of the loan, followed by the normal step program of payments starting at 2%; if you have some money saved, you can greatly improve the chances the Lender will give you the modification you want by offering them some cash upon settlement;

6. If the Lender won’t settle, return to Court and continue to hold the lender’s feet to the fire by aggressively defending your position; eventually, we believe, they will settle (or we may have developed enough evidence by then to defeat them at trial).

7. Enjoy your home, knowing that you have gotten the very best deal that can be negotiated. You will enjoy the benefits of having defended for many years to come.