Beware of loan modification scams

Reader Question: What do you know about a company called “name omitted”? Can they really help? Are they a legitimate company?

Monty’s Answer: Hello Ely, and thanks for the question. I do not recommend or rate businesses, but some comments and suggestions may be helpful.

Background is important.

Companies like the one being questioned specialize in loan modifications. These companies have sprung up nationally as a result of the real estate crash of 2008 that placed millions of Americans underwater on their mortgages. There are many articles about loan modification companies and their practices, many of which warn of scams and fraud. Scammers know some people get desperate when working to save their home. While there are legitimate people practicing in this specialty, not all loan modification companies are legitimate.

The 2008 real estate meltdown brought new regulation and programs aimed to help the economy (and the borrowers) recover. One of these programs is the Home Affordable Modification Program (HAMP). The program’s aim is to encourage lenders to modify a borrower’s loan terms to enable them to stay in their home.

The Net Present Value formula.

Initially, the program came under criticism because only a small percentage of applicants received a modification from their lender. The US Treasury and Housing and Urban Development (HUD) departments stepped in to improve the rules and create a Net Present Value (NPV) formula that require lenders to modify a loan if the borrower passes the NPV test. Editors Note: The HAMP program has expired in May, 2018.

From a lender’s point of view, the NPV formula determines the lender’s risk in a loan modification scenario. If it is in the lender’s best interest financially to modify the loan, the borrower “passes” the test.

Many borrowers have circumstances that put them in arrears on their loans. Some have tried and failed because they did not pass the Net Present Value (NPV) test, others are reluctant to try, some are unaware a modification is a possibility and others have succeeded in obtaining a loan modification.

The good, the bad and the ugly.

A major problem in qualifying these loan modification companies is their record of success is unknown. Knowing the percentages of applicants that are successful would be enormously helpful. HUD claims that 87% of the applicants starting the HAMP program in the past two and one half years have received permanent modifications of their mortgages. HUD also states 1.1 million borrowers have received permanent modifications through the HAMP program that resulted in an average monthly payment savings of $546. They do not reveal the lender or any advisor involved.

An article published in 2009 by NBC online is worth a read today. It is one reporter’s view of the troubled housing market.

I called one of these loan modification companies and was told they charge a $3500 fee, yet people sign up for their service. Here is where the NBC article comes into play. The pitch is that very few people attempting a loan modification from the free sources will qualify for a modification. The company stated their fee is based on billable hours by highly trained (and compensated) consultants that achieve the desired outcome.

The company’s “deliverable” (the deliverable is a tangible product one pays for) is a written plan they create particularly for your unique situation that coaches you on steps you must take to pass the NPV test.

There are a number of companies with websites that describe different tactics. Some companies claim no fee will be paid unless they are successful.

Put a pencil to the numbers.

When there are sources such as the Department of Housing and Urban Development (HUD) and the Department of the Treasury that give advice about modifying your loan, and do not charge a fee, a person considering a loan modification has to give sources like this strong consideration. It is worth some serious research.

I do not know your circumstances, Ely, but talking to the “free” housing counselors first seems logical. You may have to make a number of calls to find a counselor who is interested and knows their stuff. When you speak with them, ask them how many loan modifications applications have been successful? Ask them how, exactly, they go about this task. Do they actually speak with your lender? Do they coach you on how to change your circumstances so that you will qualify?

I hope this information is helpful, Ely. Ask if there are other questions.