Mortgage Modification – Bankruptcy – Creative Financing

Virtually all of my modification clients tried it on their own and were turned down. Servicers will turn a borrower down and not tell them why.

There are many tricks and techniques which we have learned with are not commonly known.

It is to the advantage of servicers for modification to fail. Servicers get paid more if there is a foreclosure, while the home owner and the investor are the losers.

Yes, many borrowers do succeed with their modifications, however, many just get the run around. The non-attorneys have for the most part been put out of the modification business because they cannot charge up-front fees, and that is good. Modifying a mortgage is the practice of law. Non-attorneys should never have been doing modifications in the first place.

If you hire an attorney, it should be an in-state attorney.

It is important to look at all sides of a borrower’s situation, including the first and second mortgages and other debt. Maybe the second can be discharged in a Chapter 13. Maybe it can be negotiated away for a greatly reduced payoff.

Bankruptcy attorneys are not always the best qualified to handle modifications. They often focus only on bankruptcy as an option, and maybe bankruptcy is not necessary.

The goal is to help the borrower get the 2% rate with a 40-year amortization. If that can be accomplished, it is worthwhile to keep the house even if it is underwater.

There are now numerous attorneys in Washington doing modifications, and the attorney fee is typically less than the cost of a refinance. Most borrowers do not have the time to figure out all the technical rules, so hiring legal counsel can be a wise move. Attorneys generally do not want to take on a modification unless the numbers look right and the modification can be done. Some people do not qualify because income is too high or too low, and these people should apply for short sale.

My point is that just because a lucky few can do their own modifications for free does not mean that everyone should avoid hiring an attorney who has worked on hundreds of these.

You get what you pay for.

The Federal Trade Commission is up to no good. The FTC proposes to enact a regulation which will prohibit third-party modification providers, including attorneys, from charging advance fees.

See: http://www.ftc.gov/opa/2010/02/mars.shtm for a summary of the proposed regulation.

See http://edocket.access.gpo.gov/2010/2010-4651.htm for the full text of the proposed regulation.

California passed a law forbidding all up-front fees on mortgage modifications, including fees paid to attorneys. For the full text of the California law, see http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0051-0100/sb_94_bill_20091011_chaptered.html.

There is no other area of law practice where clients are prohibited from paying their lawyers in advance.

What has happened in California is that attorneys have stopped providing modification services in most cases. The way attorneys have sidestepped the law is to file suit against each lender they are negotiating with. The California law does not prohibit advance fees when litigation is involved. This raises the cost substantially.

Most of the clients who hire me to work on modifying their loans have tried doing it themselves. They realize that this is complex legal work and that they need help.

The reason why the mortgage modification scandal arose, with people paying advance fees and not getting good service, was that the fees where in most cases paid to non-attorneys. In 2008 and 2009 loan officers and real estate agents were closing no deals. So they got involved in mortgage modification. Some non-attorney modification companies claimed to have attorneys on staff or available to review the work or to negotiate with lenders. In many cases this was not true.

A real estate agent can negotiate a purchase and sale agreement. A loan officer can put together a mortgage. But renegotiating a mortgage after it is in place is far different. Mortgage modification is the practice of law. It involves studing the laws pertaining to modification and interpreting them. It involves advising clients regarding whether they should file bankruptcy and under what chapter they should file. It involves counseling clients about deficiency judgments. It involves advising clients regarding how to handle second mortgages, credit card debts, and car loans.

Non-attorney modifiers spend a lot of their time saying, “Well I can’t answer that question. You need to talk with an attorney.” The entire field bristles with legal issues, so why are real estate agents and loan officers trying to do the work? Lawyers should be the ones doing the modifications.

Attorneys have been negotiating mortgage modifications for centuries. They have been referred to previously as “workouts.” To prohibit attorneys from charging advance fees is the same as prohibiting attorneys from doing workouts.

Another irony is that the California law and this new FTC regulation would only apply only to owner-occupied one to four unit owner-occupied residences. If you own a rental home or four-plex or an apartment building or a sky scraper, you can hire an attorney and pay him an advance fee to negotiate a workout. But if you live in your one to four unit property, you cannot pay an attorney advance fees to modify your loan.

The practical impact of such a law will be that people who need legal services will not be able to obtain them. And that is because they will not be able to convince the lawyer to do the work without paying him in advance.

Why are attorneys and why am I unwilling to work for clients who do not pay me in advance? Clients who do not pay in advance are not committed to me. I am committed to them, but they are not committed to me. I am required by my ethical standards and my bar association to be committed to the client, but the client is not governed by any regulatory body that obligates them to pay me. Many clients who need mortgage modification are on the verge of bankruptcy. Sometimes I advise them to file bankruptcy. When they file bankruptcy, they are discharged from their debts, including their debt to me. Even if they do not file bankruptcy they might still refuse to pay for work done well. I am not interested in chasing clients who fail to pay. It is usually a waste of time and money.

Further, lenders generally do their best to circumvent attorneys. They call and write directly to clients. They act as if the attorney does not exist. Many lenders actively discourage clients from working with “third-party providers.” Chase has such a discouragement on its recorded hold message. I have had situations where I was not paid in advance, where the lender granted modification to the client, and where the client accepted the modification and did not tell me what had happend. And the clients conveniently forgot to pay me.

If clients pay me in advance I feel a great responsibility to work hard for them. If they do not pay me in advance, I do not know whether they will be loyal to me at all. Not being paid in advance affects my willingness to work hard for my clients.

As an attorney I am subject to regulation by the Washington Bar Association. If I fail to do my job conscientiously, I can be disciplined. It is not necessary for the California legislature or the FTC to be passing laws that prohibit me from collecting fair fees from clients. 

I work my heart out for my clients. I am not interested in working my heart out for clients and not getting paid.