What Is Mortgage Modification And An Automatic Stay?
Mortgage modification is not part of bankruptcy. When we talk about mortgage modification, this is something that is relatively new. In general a mortgage modification is when your lender determines whether they will allow you to change the terms of your mortgage and modify it. This came to fruition with the economic recession, and the real estate crash of 2008-2009. Mortgage loan modifications were created because the federal government was putting pressure on major banks that handle large amounts of home mortgage lending, to try to work with homeowners to help people keep their homes. The unfortunate thing about it is there are no real teeth to the laws for mortgage loan modification.
You may have heard of HAMP (Home Affordability Modification Program), and HARP which is the refinance program. The government tried to layout guidelines for major mortgage lenders to work with people. Nevertheless, there are no real teeth to these laws.
What ends up happening are the national banks that have thousands and thousands of loans, but only have a small staff of people handling these modifications. These modification applications are from all over the country. Things are getting lost, there are large delays, and people cannot respond to your questions fast enough. Many people have frustrations when submitting documents and the bank employees are claiming documents were not received and requesting the same information repeatedly.
Essentially, the application documents consist of two years of tax returns, pay stubs, and bank statements. They want a financial snapshot of your income and expense situation to determine whether you qualify for what they would deem their requirements for a modification. What they are looking for is a hardship case that justifies working out something with you. The best thing that you could hope for is if you are working on the modification process, is take the amount you are behind on, and put it on the end of your mortgage as a balloon payment, which comes due after you finish your regular monthly mortgage payments.
They are going to cancel the foreclosure sale or agree not to move forward with the foreclosure sale at this point. Sometimes, they will reduce the monthly payment, but I have actually met with people who have gone through the modification process, and have had their payments increased because of a number of different circumstances. The fantasy that the mortgage lender is going to see that your house is not nearly worth what it was when you bought it, and so they are going to cut $30,000 off the principal is simply not going to happen. If anyone is going to take a haircut, it is going to be the homeowner, not the bank.
Banks will take the amount of monthly mortgage payments that you missed and stick them on the end of your mortgage. You then will have to figure out how to make that balloon payment in fifteen plus years when it comes due. You can either re-finance and pay it off at that point, or just come up with the money. That is really what the modification process does. As we are removed from the economic recession, and the real estate market begins to recover, I see lenders doing this less and less. A mortgage modification is more of a Hail Mary pass at this point that you are A) going to qualify for what they deem their criteria to modify the mortgage and 2) you going to get something that does benefit you.
A couple of years ago, Minnesota law put in place what is called Dual Tracking. People got behind on their mortgage and they submitted the application for the loan modification. While they were going through this loan modification process, the banks were also lining up all the foreclosure procedures that they needed to do and started sending out the notices. If they did not approve of the loan modification, then they could have everything ready to move forward on the foreclosure.
It was really hurting people, because they were hearing one thing from the mortgage lender that the mortgage lender was looking into the modification and everything was fine. But if something fell apart or a document did not get submitted on time then the bank would just turn around and move forward with the foreclosure process. The state of Minnesota has now made that practice illegal. The mortgage lenders have to pursue one or the other, they cannot dual-track both alternatives at the same time. If the mortgage lender is considering a modification, it cannot also be putting things in place for a quick foreclosure sale.
In terms of bankruptcy, the automatic stay is one of the key benefits of filing for bankruptcy. It applies in both chapter 7, and 13. That stay is going to stay, or stop any collection activities, on the date we file your case. Foreclosure sale, garnishments, bank levies, collection calls, collection letters, all of that stops. Unlike a modification, which is trying to work things out, negotiate an agreement between you and the mortgage lender to stop a potential foreclosure, an automatic stay is the backing of the federal government that prohibits the foreclosure under federal law.
It is a much more powerful, reliable form of protection from foreclosure than the loan modification process. I am not saying that you should not attempt a loan modification if you think you might qualify, but I would certainly say, “Don’t hold your breath. Try to keep your expectations realistic.” If you begin that path, and you determine, “Hey, this really isn’t working out the way I hoped it would,” then you should certainly be looking at bankruptcy as a potential plan B.
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