Loan Modifications: Good Idea or Bad?
If you've ever been significantly behind on a loan, you've probably been asked by a customer service representative if you'd like to apply for a loan modification. You will then hear that a loan modification will lower your monthly premiums and stop the incessant phone calls demanding that you catch up on your payments. What's not to like?
Indeed, there can be a lot to like, but you may come to loathe a loan modification, too. While it may look like your lender is throwing you a lifesaver, it may actually be an anchor. That doesn't mean you shouldn't take a loan modification. But before you jump at the chance, consider all of the angles.
The lender is going to come out on top. That's almost inevitable. It might be helpful, when you're thinking about a loan modification, to pretend that you're in Vegas. Think of your lender as a casino that wants your money. You want to win, but odds are, if you aren't careful, you're going to lose your shirt.
After all, a loan modification isn't a refinance. You refinance when you want a better interest rate, and you have the good credit to get it.
As a general rule, you tend to modify a loan when your credit is bad enough that you can't refinance the loan -- so your lender changes the terms of how you're borrowing for this current loan, so you can get back on your feet and continue paying off the loan. As Steven Hinrichs, a plumber in Willernie, Minnesota, found out, this almost always means that while your payments may become lower, the length of your loan stretches out much further.
Loan modifications are confusing. Partially because of the abundance of legalese in the paperwork, it's easy to agree to something you don't realize you're agreeing to.
That's what happened to Hinrichs.
"My husband did a loan modification on our home several years ago, before we knew each other. What was interesting is that they modified the terms of the loan, however, rather than forgive $40,000, which he was led to believe was happening. That $40,000 is tacked onto the end of the loan," says Hinrichs' wife, Kristin, who owns the company Best in Learning, which provides training products and services for businesses. "They made the payments affordable, but it was a surprise when trying to refinance that the equity that he thought he had was not there."
If you've been through a loan modification, or know something about the process, it isn't surprising that a bank would shift money owed to the back of a loan rather than forgive it entirely (see previous section; the lender is going to come out on top), but Hinrichs says he received a flurry of documents in the mail and had a short phone conversation with someone from his lender. He doesn't believe he was purposefully misled, but nobody spelled out how the modification would work, either.
"They knew what they were going to do before they did it," says Steven Hinrichs, who modified his loan during the recession and when a loved one was sick; he was buried in medical bills.
"They never explained if I had any options," says Hinrichs, who justifies his reluctance to ask a lot of questions by adding: "When you're losing your house, you have a tendency to look at things a little differently."
Hinrichs concedes that he may have well taken the deal anyway, but he would have appreciated more clarity from his bank.
One reason loan modifications are perplexing is that there isn't one approach to modifying a loan. For instance, just because you modified your student loans, for instance, doesn't mean it will work as easily for your home or car, which have their own quirks. Some federal student loans allow you to skip some payments for a few months or a year -- with no interest added. But other federal student loans don't.
Loan modifications are a hassle. If you're drowning in debt and need that lifesaver, you may feel wasted time isn't a big deal, and that's actually a pretty good barometer for deciding whether a loan modification is worth the hassle, especially with a house. If you don't mind being continually frustrated by the loan modification paperwork, you are probably in bad enough shape that you really do need a loan modification, especially if this is a loan for your house, and you're worried about losing your home.
%VIRTUAL-pullquote-A loan modification for a home can be a very long, frustrating process.%"A loan modification for a home can be a very long, frustrating process," says Anne-Marie Bowen, a consumer debtor bankruptcy attorney in Orlando, Florida, who has a lot of experience with loan modifications. "So unless a person has a very high interest rate, is behind in payments or has other poor terms like an interest-only loan which is about to come due, then the person would not want to go through the hassle of trying to modify their home loan."
Loan modifications attract rip-off artists. Con artists know that consumers tend to ask for loan modifications when they are struggling, and it doesn't help the situation that as soon as your home goes into foreclosure, it becomes a matter of public record. It's like advertising to shifty third-party companies and criminals that, hey, here's another vulnerable victim.
Maribel Alvarez, 53, a divorced mother of four with three kids still depending on her, is a purchasing assistant in Lodi, New Jersey, and discovered the hard way how susceptible loan modification candidates are to scams.
In 2012, Alvarez lost her job as an office manager and was unemployed for a little over a year. She finally landed a job in early 2014, but one that pays $30,000 less than her previous position. Not surprisingly, she fell behind on her mortgage payments.
Alvarez approached her bank to get help. "They indicated that they couldn't help me and offered a short sale," she says.
But in March of 2014, Alvarez received a phone call from a company that told her that her bank suggested she employ its services to work out a loan modification.
Alvarez was relieved, and the company's website looked reputable. But if Alvarez had done more online sleuthing, she would have noticed the company had an abnormal amount of customer complaints with the Consumer Financial Protection Bureau and has been accused of hurting homeowners with illegal loan servicing and debt-collection practices.
"Don't act out of desperation, and take your time to research the company beforehand," Alvarez now advises. She adds that knowing the laws around loan modification would have helped, too. She would have realized that collecting upfront legal fees for loan modification services, before the services are completed, is illegal.
And then she wouldn't have mailed the company a check for $4,165.
She never got her loan modification.
She also never got her $4,165 back.
Alvarez is currently working with PeopleClaim.com, a free (with some premium services) online dispute resolution service, to try to get her money returned.
As for her house, Alvarez has caught up on her payments. "By the grace of God, I've been able to make my mortgage payments by living frugally and juggling with other bill payments. It's been really stressful to say the least," she says.
Geoff Williams is a regular contributor to U.S. News. He is also the author of several books, including "Washed Away," about the great flood of 1913, "C.C. Pyle's Amazing Foot Race," about the infamous Bunion Derby of 1928 and "Living Well with Bad Credit." You can follow him on Twitter @geoffw.