Now, I don’t mean to be overly flippant or anything, nor to be accused of promoting “irresponsible behavior” by advocating that people walk away from valid and legitimate debts, but I have to say that the single most effective “mortgage modification” tool for most borrowers these days is found the United States Bankruptcy Code.
So here–with a nod to Letterman for borrowed style points–counting backwards from 10 to 1, are the Top 10 Reasons why, more often than not, I advocate filing a bankruptcy petition instead of incurring the brain damage of trying to deal with banks.
(Lawyerly or, the obligatory “all things being equal” caveat: This is true in many, but not all cases, and I’m assuming that the borrower has a fair and real choice between these two options. Like with ANY legal remedy, it has to make sense for your particular circumstances, and, of course, the numbers have to crunch. Bankruptcy is a technical and specialized area of law, so the decision should be made neither lightly, nor without expert guidance. Things may also change over the coming months when–or more accurately, if–the lending industry gets its “mortgage modification” act together and actually raises their success ratio to something more respectable. As it is now, in some areas, the default rate is as high (around 5%) as the “mortgage modification” success rate is low. That’s a disgrace.
Anyhow, on with the Top 10 List.
10. Bankruptcy doesn’t require you to bare your soul to some faceless, nameless banker only to have them tell you you’re not “qualified” for their mortgage modification program. Of course, this is inane to start with: If a borrower was “qualified” for the unaffordable, predatory loan that got them into the dilemma in the first place, how could they not be “qualified” for something more affordable now? This is “bank logic” talking. And it’s “bank logic” that caused this mess to begin with. Arguing YOUR personal finance with a banker is like arguing about Halloween candy with an 8-year old. Generally, you can’t win this argument so why have it? (For an absolutely classic example of this absurd paradigm in action, check out this story on MSNBC.)
Recent reports suggest that only about 5% of attempted mortgage modifications are actually succeeding. Success being defined as a negotiation that concludes with a new, supposedly more affordable mortgage. What about the other 95%?
First of all, the bank has probably squeezed another few months of interest payments out of the borrower as they strung them along leading you to believe that your “application” for a modification was being seriously considered. And second, all the information you worked so hard to assemble for your banker will now to go into your “file,” to be used for who-knows-what-purpose. Since I’m a lawyer, I’m paranoid by habit and profession. I assume it goes into storage to be be puled out and used against you later when when the bank decides to sue you for a deficiency.
9. The lender doesn’t get a vote. Generally, if you file a bankruptcy petition with a goal being to jettison a burdensome and onerous mortgage, barring something going seriously awry, you’re going to achieve that goal. No matter what the bank has to say about it. In the vast majority of cases, they don’t get to vote.
8. Bankruptcy is faster and will get you back on the road to financial recovery much faster than a bank sponsored “mortgage modification.” Chapter 7 can be over and done with in as little as 3 to 4 months. Chapter 13 can have you in an affordable payment plan even sooner. In order to even qualify for a “mortgage modification” program right now, in most instances, you need to be at least 60 to 90 days delinquent before they’ll even talk to you.
Then, after you’ve prostrated yourself on the altar of some Loan Modification Committee of Third National Bank of Timbuktu trying to get a modification approved, or worse, had to deal with some newly minted “loss mitigation specialist,” you are likely to wait for another 3 to 6 months for any word. Why? Because they are up to their eyeballs in “loan modification requests” and they are noteager to make those painful modifications. Banks are not modifying loans because they think it’s a good idea; they’re doing it because they have no choice. But if they can suck a few more months of interest out of you then, in the bankers’ logic, they’re making lemonade out of lemons. It’s a get-what-we-can-while-we-can mentality. If your financial statement leads them to believe that you’re a likely Chapter 7 candidate anyhow, it’s in their best interests to recover as much as they can before that happens.
7. It’s (probably) cheaper. This is a hard one to be sure of, but if you hire an attorney (or worse, one of these new “loan modification companies” that are popping up like weeds these days) to try to assist you with a mortgage modification application, and then pay him or her to run all that interference for you, your final bill is likely to be significant. (And don’t shop for a mortgage banking/loan workout lawyer based on the low bidder. You get what you pay for in the legal profession and there aren’t a whole lot of low cost lawyers who understand the law of mortgage and real estate finance. (Mortgage, bankruptcy and insolvency law is not a first offense DUI or uncontested divorce where pretty much anyone with a bar card can get you through the process. In banking law you get what you will get what pay for.)
In bankruptcy, most attorneys charge a fixed fee for taking the client all the way through the process, and those fees are subject to the approval (and possible adjustment) by the Bankruptcy Court. Filing fees are relatively cheap, at present, $299 for a Chapter 7 and $234 for a Chapter 13.
Paying an attorney to try to get a home loan modification approved is tantamount to handing over a blank check. As much as I love my profession and trust in the utmost integrity of my fellow members of the bar, only a fool gives a lawyer a blank check.
6. You don’t have to talk to any bankers. Nothing personal to any of my banker readers (as if) but dealing with bankers is only slightly less painful and irritating than a root canal. Contrary to what you may have heard, bankers don’t care about you. Their job is to lend money and maximize their company’s return on investment, or, in this economy, minimize loss. Converting an asset that is returning 8.5% interest into one that only returns 6.5% is going backwards. Bankers created this mess. I don’t believe it’s realistic to believe that they’re going to be the ones to fix it.
5. When bankruptcy is over, it’s over, and it feels very good. Mortgage modifications are forever. Or until you default again.
There is no doubt but that, in addition to the day they graduated from college, the day they were married, and the day their first child was born, other Red Letter Days in the lives of people who have endured financial stresses severe enough to make them consider bankruptcy, include the day they got their discharge and emerged from bankruptcy. It’s like the relief one might expect to feel when you stop banging your head against a brick wall. In my experience, I’ve never heard anyone who relieved themselves of mountains of unmanageable debt say they wish they hadn’t filed. What I hear is that they wish they hadn’t waited so long.
4. You can’t get scammed by a bankruptcy court that’s giving you relief from the guy who scammed you in the first place. LoanSafe.org is reporting that “loan modification scams” are one of the hottest new consumer ripoff industries. I suppose they take a lot of different forms, but be careful. At least lawyers have to be licensed, bankruptcy fees are subject to the supervision of the court, and loan modification scam artists generally don’t hang around in Federal court rooms wearing black robes.
3. The Bankruptcy discharge is forever. More than half of mortgage modifications are headed for another default. What do I mean by this? Well, first of all, a little background, and if you don’t want the background, skip the next paragraph and race to the “payoff.”
One of the Federal government’s official keeper of mortgage statistics is the Office of Thrift Supervision, known–as with any self-respecting government bureaucracy–by its acronym OTS. (OTS is a wholly owned subsidiary of the US Department of Treasury for those keeping track.) Every quarter, OTS releases its “Mortgage Metrics” report, which is a 25 to 30 page impenetrable tome of economic gobbledy gook. If you don’t believe me, here’s Q1 2008 and here’s Q2 2008.
Now the payoff: The Mortgage Metrics Q3 2008 report will, when it is released, report that 53% of all mortgages that are modified wind up back in default. This is what is being reported by sources that have seen it, or at least talked to people who have seen it. My source? MortgageDaily.com.
2. Bankruptcy is less stressful. Financial fear and worry is one of the worst sources of stress that we can suffer from. It’s only exacerbated when the cause of that stress is also the very roof over our heads.
1. When it’s over, you get a REAL fresh start. Bankruptcy is a financial reboot. A whole new day. Yes, if you are successful in completing a loan workout with your lender, there will be relief. Probably substantial relief. But you also don’t get to start a rebuild, or get rid of other debts and liabilities that may threaten to drag you down again later. If your oppressive mortgage is your only financial woe, then you may get some real relief from a mortgage modification attempt. But those sorts of problems are not usually so isolated.
Again, I don’t mean to sound flip, nor to minimize the impact of having to file bankruptcy. But if you are able to do so, and if your mortgage is only one part of a larger scheme of financial woes, what better way to “modify a mortgage” than to get rid of it? Of course, this means that you will also lose the property, but in most of the cases that I’m reviewing these days, that isn’t a priority anymore. When the loan is $750,000 and the house is worth $600,000, what’s left to save? (Those are Northern California numbers; your examples may vary if you live in other parts of the country.)
Upshot: Know your options before you dive into a process that may not do as much for you as you hope it will.