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Loan Modification Trap

Distressed Homeowners Being Accused of Fraud

Ashburn, Virginia - April 14, 2009 -- Some mortgage lenders are springing a “loan modification trap” of criminal prosecution against homeowners who try to avoid foreclosure, says a mortgage expert firm, Mortgage Fraud Examiners. Rather than cooperating with homeowners needing loan modifications, some lenders report struggling homeowners to the FBI or State authorities for bank fraud.

Storm Bradford of Mortgage Fraud Examiners states:

"The Obama Administration warned this past week that most loan modification companies take advantage of borrowers in danger of default by charging upfront fees of $1,000 to $3,000 for help with loan modifications that rarely, if ever, pay off. Such private firms are competing with the Obama Administration’s own loan modification service. Thus far, that government service also "rarely, if ever, pays off".

Government officials evaded the question of why loan modification efforts "rarely, if ever, pay off." Mortgage lenders are refusing to cooperate with struggling homeowners – unless forced to re-negotiate terms by legal challenges. The root of the problem is that lenders are not agreeing to lower monthly payments, even to avoid foreclosures.

Instead, when homeowners submit financial information to renegotiate the terms of a mortgage or a short-sale, lenders are comparing their new request with the original loan application. If salary and employment information are inconsistent, many lenders are turning this information over to the FBI to prosecute homeowners for bank fraud.

Mortgage Fraud Examiners CEO Storm Bradford explains, “Homeowners must be careful to retrieve a copy of their original loan application before requesting a loan modification. Information on the new request must match the original application, or else be clearly explained and documented.”

Congress and the White House have pinned the nation’s hopes for the housing market on homeowners renegotiating their loan payments. Yet this strategy is failing. The government criticizes private firms, but “free” government programs are also failing.

Lenders are not cooperating with loan modifications; Homeowners have no leverage when talking to mortgage companies and banks. Bank officials will not take responsibility for cutting loan payments. As a result, using a loan modification firm often means paying several thousand dollars for a simple phone call, to which the answer will predictably be “no.” The primary fault, however, is with uncooperative lenders who would rather foreclose than take responsibility for lowering interest rates or forgiving principal.

A new study exposes the failure of loan modifications in general. Alan M. White (Valparaiso University - Law School), Deleveraging The American Homeowner: The Failure Of 2008 Voluntary Mortgage Contract Modifications, publication pending in the Connecticut Law Review. Professor White found that “more than nine out of ten voluntary mortgage modifications in 2008 involved no cancellation of principal, past due interest or even late fees or expenses. The typical modification requires the homeowner to capitalize unpaid amounts or to convert them to a balloon payment.” (Payments are merely shifted to the end of the loan term.) Because mortgage lenders are not genuinely providing any real relief, half of restructured loans default within 6 months.

Professor White’s study found that servicing contracts encourage loan servicing companies to foreclose. “Mortgage servicer compensation (for securitized mortgages) is governed by pooling and servicing agreements (“PSAs”). Servicers receive income from a fixed portion of monthly interest payments actually received, from late fees and other default charges, and from the interest on funds held for investors or escrow.”

“On the other hand they typically must advance interest to investors when the borrower doesn’t make a payment. They also advance funds to third parties, like lawyers, during the foreclosure process. The servicer recovers its advances only when the borrower eventually brings payments current, or when a foreclosure sale is completed. However, if a delinquent mortgage is modified, the servicer will not recover the advances made to investors on that account until the borrower repays the servicer. This is particularly problematic for the servicer when the advances are deferred in a balloon payment due in thirty years.”

So, these contracts misdirect actions toward destructive foreclosures. Dumping more houses on the market then drives down neighborhood market values even further, creating a “death spiral.”

Instead, Bradford and his team of lawyers perform forensic appraisals and loan audits, documenting legal violations. These audits can then be used by locally-licensed attorneys in each State to take legal action, or used as leverage for meaningful loan modification negotiations.

Bradford estimates that “up to 85% of all mortgages may be legally unenforceable due to defects like lost notes, improper notices, appraisal and/or mortgage fraud. When facing a possible lawsuit after an audit, lenders suddenly get religion and become much more cooperative in renegotiating the terms of a loan.”

"You need to take advantage of every conceivable resource that you can find to use against your lender," Bradford says. "We do a forensic audit, along with a forensic appraisal, to examine whether or not there are any legal violations. We give you another piece to use against your lender that nobody else does."

Several homeowners who have used what Bradford preaches, have won million dollar lawsuits against lenders, or have received other such favorable outcomes."

SOURCE: Mortgage Fraud Examiners

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