On March 24th 2009, the senate committee met to discuss the serious problem of foreclosures and related services by 3rd party companies claiming to provide a service by offering loan modification services.  Often referred in the dialogue as “foreclosure scams”.  Many of those scams involve a promise to renegotiate a delinquent borrower’s loan in exchange for a significant up-front fee.

This notion of paying a 3rd party company to negotiate on your behalf has been met with serious head winds from legislators.  SB 94 looks to stem the tide of this massive fee based loan modification movement and put the responsibility back with the home owner.  Not every company out there offering loan modification services is scam.  In fact there are a small group of them doing it legitimately.  However, the majority of them are scam-is by nature and ruin the industry for the companies running within the rules.

This bill  would prohibit any person who solicits customers for the purpose of helping negotiate a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation, or otherwise offers to perform these services for a borrower for a fee or other compensation, from doing any of the following: claiming, demanding, charging, collecting, or receiving any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform; taking any wage assignment, any lien of any type on real or personal property, or any other security to secure the payment of compensation; or taking any power of attorney from the borrower for any purpose.

This bill would additionally require any person who solicits customers for the purpose of helping negotiate a mortgage loan modification or other form of mortgage loan forbearance for a fee or other form of compensation, or who otherwise offers to perform these services for a borrower for a fee or other form of compensation, to provide the following notice to the borrower, as a separate statement, in not less than 14-point bold type, prior to entering into any fee agreement with the borrower:

IT IS NOT NECESSARY TO PAY A THIRD PARTY TO ARRANGE FOR A LOAN MODIFICATION OR OTHER FORM OF FORBEARANCE FROM YOUR MORTGAGE LENDER OR SERVICER.  YOU MAY CALL YOUR LENDER DIRECTLY TO ASK FOR A CHANGE IN YOUR LOAN TERMS. NONPROFIT HOUSING COUNSELING  AGENCIES ALSO OFFER THESE AND OTHER FORMS OF BORROWER ASSISTANCE FREE OF CHARGE.  A LIST OF NONPROFIT HOUSING COUNSELING AGENCIES APPROVED BY THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) IS AVAILABLE FROM YOUR LOCAL HUD OFFICE OR BY VISITING WWW.HUD.GOV.

This bill would provide that a violation of the above advance fee provisions and notice requirements is a public offense, punishable by a fine not exceeding $10,000 for a natural person or $50,000 for a corporation, or by imprisonment in a county jail for up to one year, or by both a fine and imprisonment. Those penalties are cumulative to any other remedies or penalties provided by law.

This bill would prohibit advance fees for loan modifications as noted above, this Committee heard testimony during the March 24, 2009 informational hearing on the wide breadth and scope of foreclosure scams that are taking advantage of desperate homeowners.  Many of the consumer advocates, and representatives from law enforcement, expressed their strong belief that advance fees should be completely banned as it is almost impossible to tell a legitimate service from one that will take a borrower’s money and not perform the promised services.  Regarding the advance fees that are currently being charged to struggling homeowners, California ACORN, in support, reports:

“We are hearing that people are being charged up to $500 just to fill out an application, $2,000 – $6,000 in conjunction with the promise of a modification, and on top of that up to  $5,000 – $8,000 for the scammer to negotiate with a servicer on their behalf.  Most people paid some of the fees before they realized nothing was being done, and before they were aware that with simple instructions like those shown in Modification Professor these services are virtually free”

As anyone how has ever used a government service knows they are slow and cumbersome to use.  Often times you have to wait in impossible lines and once you get in front of a counselor you find out they cannot give you advice but only point you in a direction.  This is frustration top of frustration.  A loan modification can be a simple process but you only have one shot at it.  You cannot present your case and then later come back and change your tune.  That is why it’s important to understand how the lender works, how the lender thinks and what the lender will do for you based on real numbers.  Modification Professor is the real solution for most home owners.  Modification Professor bridges the gap between not knowing anything about loan modifications and paying a professional who knows how to get it done.  It’s the best of both worlds and provides a real and tangible solution verses empty and sometime unachievable results by foreclosure scam companies.

One question people always as me is how the bond market plays into interest rates.  Furthermore they want to know what will happen to loan modifications if interest rates go up.

To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.

Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.

“If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity,” said economist Ed Yardeni, who runs his own investment firm. “Even worse, they could abort any necessary recovery in home sales and prices.”

All of this points to a potential unwhinding of recent market gains.  Ultimatly it could stall a recovery.  This however does not affect the loan modification movement in any way.  If anything this furthers the cause. 

As interest rates rise, the ability for home owners to refinance out of thier high rate loans, diminishes.  They will have a greater need to do a loan modification if they cannot refinance in the traditional sense.  Currently there are 9 million homeowners in the United States who need a loan modification.  It will take more then a year to get to all of them and even longer to write the negative assets off the books of the largest banks.

All of this translates into one common theme; Loan Modifications are here to stay.  As long as there are homes on the market with loans greater then the value, banks will have to modify existing loans to someday realize a return on thier investment.