Subprime Lenders Retool as Loan Modifiers
Two of last weeks’ posts were entitled “Distressed Housing Attracts Speculators” and “How to Spot Mortgage Fraud.” While seemingly unrelated, these topics actually speak to two trends that are closely intertwined. The first trend is that the housing bust is increasingly starting to resemble the housing boom, from the standpoint of businesses that market themselves to homeowners. The second trend is a rise in mortgage fraud, again practiced primarily by mortgage service providers.
Essentially, many such companies have retooled (or closed and then re-opened under new names) and our now offering new services under the same pretenses. Specifically, many former subprime lenders are now in the business of modifying loans. This is especially repugnant considering that it’s partially because of these subprime lenders that unaffordable loans were issued in the first place, and now require modification if foreclosure is to be avoided.
A new investigative report by the New York Times (A must-read!) details exactly how one such company operated. “For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.” Backed by misleading national advertising campaign, the company was quickly flooded with calls by people desperate to avoid foreclosure.
Sales people quoted exaggerated success rates and in some cases encouraged borrowers to take money that would otherwise be used for mortgage payments and instead advance it to the loan modification company. According to one agent, “They basically told us, ‘Do whatever you need to do,’ ” he said. “ ‘It’s a sales floor. You’re here to sell.’ People would quote success rates and just pull them out of thin air. People would say 60 percent, 80 percent, 90 percent. To the average Joe in Kansas, that sounded great. But the reality is that 50 percent were immediately declined by the lender.” Customers were further sold on the pretense that their loan modification would be vetted and submitted by a licensed attorney, which was little more than a deliberate falsehood.
The company, FedMod, now faces a lawsuit by the Fair Trade Commission, which has also brought legal action against several similar companies. Still, given that thousands of people made payments to FedMod in good faith and now face foreclosure, it’s hard to argue that justice is being served. In the end, the most important lesson to take away from this debacle is never make an upfront payment for a loan modification. Never, ever, under any circumstances. Even if you are guaranteed a 100% success rat and that a licensed attorney will review your application. Never.
In fact, you can theoretically achieve a loan modification free or charge- either by speaking directly to your lender or with the help of an organization that is not-for-profit and/or government-approved. If you still feel compelled to enlist the services of a for-profit entity, at the very least you should hold off remitting payment until after your loan has been modified.