But that only makes the borrowers eligible to apply; it does not make them entitled to a modification. The bank or servicer still gets to consider the borrowers’ financial situation and whether it will make more, or less, money by modifying their mortgage than by foreclosing. In deciding whether to grant a modification, the bank or servicer must follow written HAMP guidelines.
While these are probably closer to rules than merely guidelines, banks and servicers do try to exploit what may be loopholes. Even in the best circumstances, the guidelines do not guarantee anyone a modification. Borrowers can find a list of participating banks and servicers, the eligibility criteria and the HAMP guidelines at the MHA website.
If their bank or servicer does not participate in the MHA program, or their loan does not meet the requirements to be eligible to apply for a HAMP modification, their bank or servicer may, but does not have to, consider them for an “internal” or “in-house” modification. In those cases, banks and servicers are not restricted by any verifiable rules or guidelines when it comes to mortgage modifications. They can do whatever they want in these matters.
Myth and Legend 5: Banks and servicers give modifications because that’s the only thing that makes sense under most circumstances.
What makes sense to borrowers and what makes sense to the bank or servicer is not the same thing. For the bank or servicer, deciding whether or not to offer a modification is purely a business decision. What they will be asking themselves is whether they lose less money by modifying the mortgage or foreclosing? What they are looking at is the size of the loss, not the gain. That’s because banks and servicers know that such houses are probably underwater. They use complicated mathematical formulas (sometimes called “net present value” calculations) to help them make a decision. These calculations are designed to estimate the total amount of money, adjusted for things like interest and inflation, that the bank or servicer will collect from borrowers’ payments on a modified loan. This is one reason why banks or servicers almost never reduce the principal balance of the loan. If they modify the loan and cut principal, they have no hope of ever collecting that lowered principal. If they don’t cut principal, they keep hope alive that they will collect it all in 10, 20, 30 or 40 years.
Sadly, the human element does not factor into the bank’s or servicer’s modification decision. I don’t think it’s because they don’t care that borrowers are sick and can’t work, or that borrowers will be out on the street if they foreclose. They operate businesses and have obligations to shareholders. They don’t see the moral issues as business issues.
Myth and Legend 6: Banks or servicers will help if the borrowers let them know they are in trouble before they default.
While this myth is one of the most common, it’s just that—a myth. I am surprised at how often I continue to hear this one because it defies common sense. Why would a bank or servicer help someone who has been paying and only thinks he or she might go into default? Borrowers are not a problem for their bank or servicer until they are in default. Even then, borrowers might not really be a problem until they are several or more months behind. I’m not saying that borrowers should not alert their bank or servicer to a potential problem. I don’t think it can hurt them. I’m just saying that I don’t think they should expect any relief. It’s great if they get it, but they should not be surprised if they don’t.
The prospect of losing a home to foreclosure is a frightening one. I urge homeowners faced with this possibility not to ignore the problem. They should respond to all paperwork, learn their options and work with someone who’s been through the process. No doubt, it’s a tough maze to navigate but if they do those things and reach out for the right help, they just might find a way to make the best of a difficult situation.
Christopher Brown is a mortgage defense attorney and partner in the Connecticut and New York based law firm of Begos Horgan & Brown LLP.