One result of the collapse of the residential real estate market in 2008 was the emergence of an aggressive loan modification industry, which quickly devolved into a predatory industry. Although loan modification has always existed as an option for distressed home owners, after 2008 the concept was aggressively marketed by third party loan modification companies as a cure all solution to the problem of paying too high of a monthly mortgage payment. The aggressive marketers misrepresented the reality of loan modification, but were careful to solicit payment for services they could not deliver in advance; taking advantage of people trying to stay in their homes.

Realistically, all loan modification agreements are subject to the willing acceptance by the lender. Since any loan modification agreement is generally detrimental to the interests of the lender, it means that they will only agree to these kinds of arrangements if they determine that doing so amounts to a “lesser evil” than full foreclosure and reselling the property in question. Consequently, no loan modification agreement will be accepted by a lender if foreclosure represents a more profitable option, so all such proposals have to be designed to placate the interests of the lenders. The marketers of loan modification, on the other hand, promised clients all kinds of spectacular arrangements and implied that they had ways of “forcing” the lender to agree (typically by finding minor faults in the original mortgage loan via the use of forensic audits and the like); which was – quite simply – not true at all.

By 2009, the number of loan modification scams and victims had reached truly epidemic proportions and was noted by the Federal Bureau of Investigation as one of the fastest growing scams in the country. The federal government, however, failed to implement any sort of nationally binding legislation to place the loan modification industry under regulation, which left it in the hands of the states to do so.  Perhaps the best known state legislation meant to wipe out the predatory elements of the loan modification industry was the laws passed in California, which effectively ended most abuses and resulted in a well regulated and properly responsible loan modification industry.

Texas, like California, has also been severely hit by loan modification scammers and as a consequence Texas has introduced legislation to curtail their abuses. 81(R) S.B. 354 is currently working its way through the Texas legislature. Reflecting the generally conservative nature of Texas politics, the bill is nowhere near as comprehensive as the California legislation, but still provides a number of effective protections for distressed home owners. For example, the bill requires loan modification companies to provide clients with a written contract spelling out precisely all obligations, fees, and responsibilities of both parties (thereby eliminating the hidden fees and undefined obligations that characterize many of the scams) and prohibits the loan modification consultant (excluding properly authorized attorneys) from charging too much interest on loans, taking a personal interest in the property, or being under the influence of the lenders.

In view of all the abuses that have been well documented in Texas, it seems likely that this bill will pass and once it does so loan modification will be a much safer prospect for distressed borrowers in Texas. In the meantime, the loan modification scammers have gone into a frenzy to solicit new customers before this legislation is enacted. Therefore, unless the borrower is using a proper attorney, it is probably prudent for distressed borrowers in Texas to hold off on loan modification action until this new bill becomes law in Texas.

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After the collapse of the residential property market in 2008, loan modifications became all the rage as a means of helping people stay in the homes they bought when times were good; however the emphasis of these loan modification agreements were usually confined to borrowers that had purchased the property to serve as their primary residence. People that bought residential or commercial property for investment purposes – not as their primary home – have had a lot more difficulty getting loan modification agreements. For example, the federal government sponsored Home Affordable Modification Program (HAMP, part of the larger Make Home Affordable imitative introduced by the Obama administration) only applies to properties that is the borrower’s primary residence.

Some borrowers that bought residential properties for investment purposes have been able to successfully negotiate loan modifications as long as the initial amount borrowed still exceeded the actual current value of the property. As is always the case, the lender has to voluntarily agree to a loan modification, therefore the only incentive they have to do so when it comes to an investment property is if the borrower agrees to pay significantly more than the property could be resold for if the lender foreclosed. In the case of residential real estate – almost all of which significantly declined in value after the market collapse – this was fairly easy for the borrower to negotiate. However, this is not necessarily the case when it comes to commercial real estate, which is governed by different market pressures.

The credit crunch and the recession that followed also meant that commercial real estate also went into decline, as many businesses closed their doors and the number of new businesses being launched declined dramatically. However, unlike the commercial real estate market, it is generally expected that the overall economy will rebound considerably faster and there has already been an upsurge in new start up businesses in many major markets in the United States despite the lingering effects of the recession. This means that commercial real estate is likely to regain ground considerably faster than residential real will. As a result, there is much less of an incentive for lenders to agree to loan modification agreements in respect to commercial real estate, since it seems likely that these assets can probably be resold after a foreclosure for a similar value as that originally agreed to.

Generally speaking, it is much more difficult to get lenders to agree to a loan modification agreement for commercial property than it is for residential property. However, there are some exceptions to this rule, such as commercial property in economically distressed areas or otherwise undesirable locations. In this case, a lender may agree to a loan modification since reselling the property might be exceedingly difficult. Nevertheless, the borrower should keep in mind that whatever loan modification they propose still has to be preferable to result of foreclosure and the lender repossessing the property; therefore one should expect to still have to pay a fairly significant amount of money on a regular basis. The types of loan modifications being applied to residential properties are not applicable to commercial properties at all.

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While mortgage loan modifications have always existed as an option, they really evolved into a major industry with the collapse of the American residential real estate market in 2008. The basic idea is that loan modification lowers the monthly mortgage payment for the borrower; thereby allow them to stay in their home. This is the sole purpose of a loan modification and it requires the voluntary consent of the lender, meaning that any proposed loan modification has to offer the lender a better deal than foreclosing on the property would. Even loan modification done through the federal Housing Affordable Modification Program (HAMP, part of the larger making Home Affordable initiative) requires the active consent and endorsement of the lender, so it is important to keep this in mind.

Finding the right balance between what the borrower can afford and the point where it becomes more profitable for the lender to foreclose and resell the property is the tricky part of the process. The general standard is that the borrower should not be spending more than thirty percent of their monthly gross income on their mortgage payment. People that are already spending a smaller percentage of their monthly gross – not net – income on their mortgage payments should not even waste their time asking for a loan modification since it will probably be rejected out of hand. At the same time, these monthly payments still have to be high enough to be in the lender’s interest, therefore if the borrower has a very low income and thirty percent of this amount is too small; then the lender is likely to reject loan modification out of hand. In view of this, it should be kept in mind that loan modification is realistically restricted to people that have significant regular income.

Assuming the borrower seems likely to qualify for a loan modification – he can show financial distress, he is paying more than thirty percent of his income in mortgage, and he has a regular income – the next step is to determine how the monthly payments will be reduced. Remember that the lender has to agree to the terms, so it is extremely rare to see a lender agree to reduce the actual amount owed or the applicable interest rate. Instead, the usually method of reducing the monthly payment is to simply extend the life of the loan, or the loan’s amortization period. By spreading the same amount owed over a longer period of time, the monthly payments go down without actually reducing the amount owed. Generally the upper limit for an extension period is ten years, though the actual extension is just to the point where the borrower’s monthly payment equals thirty percent of his income.

Loan modification still makes sense for borrowers that want to stay in their homes but are having difficulty maintaining their monthly payments. However, as the residential real estate market continues to improve, the willingness of lenders to accept loan modifications decreases. Today, the main people likely to receive a loan modification agreement are those that are willing to continue paying more than the actual property is worth, on the hope that at some point in the future the value is recover to its pre-2008 level.

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