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.
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”.