Pitfalls of Bank's Pilot Mortgage Forgiveness Program

       Recently a large national bank has announced that it is launching a pilot program that will allow some homeowners facing foreclosure stay in their homes. The program would allow homeowners, who are behind in their mortgage, deed the property back to the bank and then have their mortgage debt forgiven. At this point the former homeowner would then lease the property from the bank at a lower rent than the monthly mortgage payment. The tenant would also not be responsible for the property taxes or insurance.

       This program benefits the bank for a few reasons. The bank saves the expenses it costs them to do a foreclosure (The average foreclosure takes nearly two years to complete, according to Florida-based Lender Processing Services, and costs nearly $78,000, according to a Congressional estimate.). However, the bank will face some additional costs/ responsibilities. The bank will bear the costs of property taxes, insurance, maintenance, land scaping, repairs, security, waste disposal, and other property management requirements. Furthermore, the bank would need to employ an attorney to oversee any evictions that would occur.

       For the property owner this may seem like a good way to remain in his home, however there would be some negative consequences. For instance, forgiveness on a debt is considered by the IRS as taxable income, so the homeowner could be left with a very large tax bill after a $150,000 mortgage is forgiven. Moreover, the former homeowner could be removed from the property a lot faster than if he owned the home. If the property were being foreclosed, the procedure could a couple of months and the homeowner has the protection of the Bankruptcy Code, where filing bankruptcy would cease the foreclosure and allow the debtor to make up any missed payments. However, with the former homeowner now renting his house, he can be evicted from the house in about two to three weeks if he were to miss a rent payment. Also, the Bankruptcy Code is very favorable to landlords. Remaining in the house during a bankruptcy does not alleviate the tenant's responsibilities from paying rent, while a homeowner can remain in the home a lot longer without making a mortgage payment; the post-petition rent that comes due during the bankruptcy will also not be discharged, and the tenant can later be sued for it, unlike a homeowner.

       Though it seems like this program could help the bank and homeowner, it may also be just substituting one problem with another.

Loan Modifcations: Tips and Warnings

       As a Bankruptcy Firm, we see many good, hardworking people whose homes are in foreclosure. And after all these stories, I am surprised to see that many of them fell behind because of Loan Modification Programs. To be clear, modifying your loan can help you financially; however, I want to set out many tips and warnings you need to know before attempting a modification so you do not fall victim to what has led others to foreclosure and consequentially, bankruptcy.

       First, you need to know the truth. Very few borrowers after the process end up with a loan modification. I recently spoke with a friend of mine in the mortgage loan market and learned that approximately only 6% of those who apply end up lowering their mortgage payments. Six percent, that's all!

       Second, if you want to hire an attorney to work with you and your bank for a loan modification, DO NOT hire an attorney, agency, or professional who wants to be paid up front. I've heard plenty of stories, where a person pays a couple thousand dollars to an attorney to work with their bank. That money would be better spent on paying down your actual mortgage or to savings. Lots of times, these agencies are scams who take your money and run. Other times they are legitimate, but remember SIX PERCENT success rate. The only fee arrangement you should make is that the attorney you hire will receive a percentage of any savings from a successful modification. If anyone wants money up front, go somewhere else. A contingent fee makes the person you hire actually try to succeed since that is the only way of him getting paid. If he has already been paid, then he won't care if you end up being part of the 94% who fail.

       Lastly, keep making your mortgage payments during the process! Many people have said how their Bank told them that they don't have to make payments while applying, or that the bank only accepts those who are behind in their mortgage. If you must be in default to qualify, do not do it on purpose, stay current. And when your bank tells you that you are not obligated to keep making payments, the fine print says that if you do not succeed in getting a modification, all of those missed payments come due immediately along with interest and late fees. And then the bank ends up foreclosing on your home. So keep making those payments, and if you choose not to, do not spend that money. Save it on the great chance that do not succeed in modifying your loan.

       The Loan Modification is a long, complicated, and drawn out process that will likely lead to nothing. So please be smart about your money. Hopefully, you may end up as part of the 6%, but as you go through the process, remember these helpful tips and warnings.