178 Loan Mod Companies Pursued by Government - It's About Time

Loan Modification companies seem to be the latest mortgage industry group in the crosshairs of government officials.

Detroit - Over the last several weeks I’ve noticed a substantial increase in the number of loan modification companies being investigated by various government agencies.

All I can say is that it’s about time.

Now don’t misinterpret that statement - I believe that loan modifications may be part of a viable solution in getting our country out of the current housing crisis, although it’s too soon to determine their actual long-term effectiveness.

I also have nothing against loan modification companies in general nor the people that work at them. I’ve met or connected with many individuals that are intent on really helping people and do their best to do so.

Lastly, many homeowners do need some type of assistance as lenders don’t have their best interests in mind when they do loan modifications and many lenders draw the process out seemingly forever.

On the other hand, I’ve personally heard many stories from homeowners victimized by loan modification companies, have heard the same stories from mortgage associates and have read many more on the internet.

From Subprime to Loan Mods

I predicted over a year ago that loan modification companies would become the new subprime “churn & burn” debacle. This was triggered by my observations that many local subprime loan originators were flocking to do loan modifications. I even heard several stories of these originators approaching the same clients they’d put in subprime loans, with offers to now do loan modifications for them.

There really is no barrier of entry to do loan modifications. All you need is a phone and the ability to find clients. Finding clients is easy with so many homeowners struggling with their mortgage payment.

This should all sound familiar as much of it applied to the mortgage industry in general until recently, when state governments started requiring individual licensing of loan originators and the federal government created a national registration system.

When Michigan enacted its Loan Officer Registration Act, April 1, 2009, the state expected 10,000 to register based on past data. To date only 3141 have met the requirements of 24 hours of class time, passed a multiple choice test and background screening. How many of the unregistered do you think are now using their limited mortgage knowledge to do loan modifications?

Desperate People do Desperate Things

One would think that a homeowner, burned by a bad mortgage, would be a bit more cautious when considering a loan modification.

The number of loan mod companies popping up however, prove otherwise. It’s basic supply and demand – the numbers of these companies wouldn’t be expanding if there weren’t desperate homeowners to support them.

So, how do homeowners get burned by these companies? In no particular order:

• Paying upfront fees for a modification never completed.
• Being told they’ll get a principal balance reduction, when in reality it rarely happens.
• Getting approved for a modification that raises their payment or insignificantly lowers it.
• Following advice to not contact their lenders during the loan mod process, only to get foreclosed on.
• Not being made fully aware of the possible credit damage, legal issues and tax consequences.

It’s all boils down to these companies over-promising and under-delivering.

What Took the Government So Long to Act?

If I saw this problem coming over a year ago, you’d think the smart people in our government would’ve saw it coming also.

In a recent informal poll of mortgage originators by “Think Big Work Small”, 81% responded that over 50% of those doing loan modifications are “rats”.

Unfortunately, just like with the mortgage meltdown and the banking crisis, the government only seems to act after the damage has already been done. Here’s a list of the agencies currently chasing loan mod companies:

• Federal Trade Commission
• United States Attorney’s Office for the Central District of California
• Arizona Attorney General’s Office
• California Department of Justice
• California Department of Real Estate
• State Bar of California
• Colorado Attorney General’s Office
• Idaho Attorney General’s Office
• Illinois Attorney General’s Office
• Iowa Department of Justice
• Kansas Attorney General’s Office
• Maine Attorney General’s Office
• Maine Department of Professional and Financial Regulation, Bureau of Consumer Protection
• Maryland Department of Labor, Licensing, and Regulation, Office of the Commissioner of Financial Regulation
• Massachusetts Attorney General’s Office
• Michigan Attorney General’s Office
• Missouri Attorney General’s Office
• New Jersey Attorney General’s Office
• New Jersey Department of Banking and Insurance
• New Mexico Attorney General’s Office, Consumer Protection Division
• North Carolina Department of Justice
• Ohio Attorney General’s Office
• Oregon Department of Justice
• Texas Attorney General’s Office
• Washington Attorney General’s Office

Charges are being filed because of deceptive and/or false advertising (Section 5 of the FTC Act), charging upfront for services before rendered, unlicensed activities, mail fraud, attorney misconduct and several others.

Solutions

The Obama administration really needs to step up and address this issue quickly. The crooks and sharks need to be forced out of the industry to protect homeowners. Honest professionals also need protection - from overzealous government agencies. It’d be a real shame if those that were actually doing good things for homeowners were put out of business, fined or jailed.

An easy to implement option would be to allow loan modifications to only be done by licensed mortgage companies and attorneys. The mechanisms are already in place across the country to control this.

A better solution would be for the administration to create a national solution instead of letting all 50 states come up with their individual plans.

For a list of the loan modification companies currently be investigated, click here and then click on “preview”.

Comments

[john s. gordon:]

which are the worst parasites - loan mod firms or payday lenders? maybe a dead heat.
> jack

Jul 20 09:23 AM

[Karen Consumer:]

Jack, the worst parasites are loan mod firms. If I go in for a payday loan, I'm not hoping to stay in my house, I'm just hoping to feed my family. Loan mod firms promise you hearth and home, then leave you high and dry.

Jul 20 11:50 AM

[Tony Petroski:]

You have to love the internet. An article lambasting loan modification companies draws loan modification ads parked next to it.

Jul 20 04:28 PM

[Moon Kil Woong:]

The problem is most settlements vs. companies are just monetary settlements. Like Countrywide's old employees that now buys the bad loans they themselves wrote, this does nothing about the parasites feeding off the public. Even if such businesses are forced to close, they just hop onto the next corporate bandwagon headed and run by thieves.

These people need to be shut down for good, not just their corrupt employers. They know very well regulators are too slow and there are too few to catch them all in a timely fashion.

Jul 21 02:14 AM

[John Preston:]

Why blame the vultures...its simjply free-market capitalism at its best....a glaring need,unmet, will become an new industry...

No one else stepped up to the plate, as they say...the best and brightest were no to be found....

If you all have time to criticize, then you have time to help...

You're either part of the solution, or you're part fo the problem.

Jul 21 08:53 AM

[ThePhoenix:]

The main problem I see with this whole process is that a loan modification, at least what is generally being offered is not needed and of little use to a homeowner. If a homeowner owes 400k on a home that is not worth 200k, lowering the interest rate does not help the homeowner. The loss, at that point, it truly the lender (real the underlying owners of the securities being serviced by the bank) but the lie conveyed about that process gets the poor homeowner to pay that loss for that lender and they abuse you in the process of getting it. The real math of that situation is:

Assume: Homeowner owes $400,000.00 on a home that is now worth $200,000.00. The loan of $400,000.00 has an interest rate of 6.5% The homeowner has reached out to their lender and is now offered a loan modification for an interest rate of 4.5%. This scenario achieves the following:

Current mortgage: $400,000.00 @ 6.5% = $2,528.27 per month.

Modified mortgage: $400,000.00 @ 4.5% = $2,026.74 per month.

Savings of ~$500.00 per month. On the surface, saving $500.00 per month sounds like a good deal, but is it?

Since the asset is worth only $200,000.00, consider the various interest rates for a term of 30 years:

6.5% rate gives a payment of $1,264.14.

8.5% rate gives a payment of $1,537.83.

12.0% rate gives a payment of $2,057.23, similar to modified payment proposed.

15% rate gives a payment of $2,528.89, similar to current mortgage payment.

In effect, the current lender is asking you pay a cash flow to them on an asset worth $200,000.00 with the modified loan at 12% or at the current monthly payment at 15%. This assumes that you pay your mortgage for a total of 30 years. Paying a mortgage at those rates makes no sense.

Accepting Loan Modification Cash Flow Analysis ($200,000.00 value):

30 years with a payment of $2,026.74 yielding 11.933% for a total of payments of $729,626.40.

30 years with a payoff at 10 years with a payment of $2,026.74 requires a $319,532.34 payoff yielding 14.933% for a total of payments of $562,741.14.

30 years with a payoff at 5 years with a payment of $2,026.74 requires a $363,972.30 payoff yielding 21.616% for a total of payments of $485,576.70.

This analysis is important. It would be rare that a consumer will actually go longer than 10 years with a modified loan and realistically it will end up being refinanced or the property sold somewhere between 5 to 10 years. That would mean the consumer will end up paying somewhere between 15% to almost 22%.

However, if the homeowner becomes a renter, consider this cash flow analysis:

Renting for various periods:

Renting for 10 years with rent for years 1-3 at $1,600.00 at years 4-6 at $1,750.00 at years 7-10 at $1,850.00 would be a total of payments of $213,000.00.

Renting for 5 years with rent for years 1-3 at $1,600.00 at years 4-5 at $1,750.00 would be a total of payments of $99,600.00.

Of course, none of this assumes any increase in value for the underlying property being owned nor any tax benefit. Any increase in value over the next 5-10 years is highly speculative and even a 5% increase per year still does not impact the 10 years projection in any real favorable ways. As consumers grasp this concept, the results could be dramatic.

Jul 21 11:01 AM

[Loan Survivor:]

Jack & Karen - interesting comparison.

Tony - that is funny!

Moon - the people with the money rarely get prosecuted:(

John - free market is great in theory, but if it worked perfectly we wouldn't need 80% of the laws we have.

Phoenix - great insight and numbers. Problem is I haven't found a computer yet with an "emotion" button on it. People love their homes and will do irrational things like paying thousands to strangers for a possible loan modification to try to save them. Also, if we extrapolate your argument then everyone in this country should pull their money out of the stock markets and either invest elsewhere or sit on it until market returns to its "highs".

Thank you all for your comments:)

Jul 21 12:10 PM