Mortgage Modification – Bankruptcy – Creative Financing

Bank of America is hard to work with, disorganized, and tricky.

My advice: If you have a Bank of America loan, hire a lawyer.

I will say more about B of A below, but first I will review a few of our Bank of America modifications.

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RS owns two fast food restaurants. Both of them had trouble in 2008 – 2010. RS managed to hold on by borrowing from parents and by getting behind on his mortgage.

Self-employed borrowers are more challenging to work with, but there are more opportunities to help them.

In the case of RS, we called B of A twice a week. With B of A you have to call them. They will almost never call you.

As it worked out, RS’s income was fell right into the 31% groove. We got him approved for a 2.125% rate for five years, increasing to 3.125 in the sixth year, 4.125 in the seventh year, and 4.75% for the balance of the loan. This is a 307 month amortization, meaning that the original 360 month amortization stays in place.

The modification proposal was submitted in February of 2011. The client was put into a trial modification in October. The modification was finalized in February of 2011. In the future we believe that we can move modifications through B of A faster by pestering them twice each week.

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JS was stuck in a 2/1 ARM loan with a minimum interest rate of 8.6%. He was paying over $2,200 per month on a $265,000 loan. He was unemployed for several months and then underemployed for several more. He missed ten mortgage payments.

His wife was not on the loan, but I convinced B of A to factor in her income.

Within 60 days after submitting our proposal, B of A came back with a non-HAMP modification proposal.

Unpaid payments would be added to the balance. The rate would be 3.5% interest-only for the first three years. Then the remaining balance would be amortized over 360 months at a 5.0% fixed rate.

This is not quite as good as a true HAMP modification with a 2.0% amortizing rate, but the 3.5% interest-only payments are actually lower than 2.0% amortizing payments would be.

The odd thing about the loan is that we were using the wife’s income despite the fact that she was not on the loan. Also, JS’s income is still variable from month to month.

In a case like this it is better to take a very good offer instead of holding out for a slightly better offer that might not materialize.

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On the other hand we have the saga of MS. MS was one of my first modification clients. We started working on her case in 2009, and the case took until May of 2011 to complete.

You can review MS’s modification here. Note that it is an in-house modification, not a Making Home Affordable modification. MS’s income was too high to qualify for HAMP. On the other hand, she is getting interest-only payments for the first five years.

One problem with this case was that her’s was a Countrywide loan. B of A bought Countrywide when it failed. B of A continues to operate it as a separate unit, and it is a truly disorganized unit.

Part of the problem with all old B of A modifications is that B of A originally qualified borrowers orally for its trial payment program. B of A would put anyone into a trial payment plan if they claimed to make income around 3.22 times their mortgage payment. The 3.22 figure represents the inverse of 31%.

MS qualified and started making trial payments, but B of A never sent her anything in writing. She kept making trial payments. Every few months we would have to update the file with new bank statements and pay stubs. But no modification resulted. The answer was always: It’s still in processing.

Over time MS’s income started to recover and increase. That meant that the numbers no longer favored a good modification. I think this is part of B of A’s strategy: Stall until income rises and the borrower is no longer qualified.

The moral of the story is that once a borrower gets into a trial payment program, he should push for finalization.

Under the new rules one has to prove income in writing, not orally over the phone. Once a borrower is put into a trial payment program, and as long as the borrower makes the trial payments, the lender no longer can ask for more proof of income. Thus, if income rises, the borrower does not lose his qualification. Page 77 of the MHA Handbook says:

The trial period is three months in duration (or longer if necessary to comply with applicable contractual obligations) and governed by terms set forth in the TPP Notice. Borrowers who make all trial period payments timely and who satisfy all other trial period requirements will be offered a permanent modification.

It is not absolutely clear here that no further proof regarding income can be required after one enters a trial payment program, but that is the apparent meaning. Also, in my experience, it is the custom. I have never had a lender require more income proof once a borrower entered a trial payment program.

Unfortunately, B of A has thousands of borrowers who were put into trial payment programs without their proving their income.  So when it comes time to finalize their modifications, they have to prove their income. If their income has risen or fallen, they may be out of luck.

See MS’s modification here.

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Now, more about just how bad Bank of America is when it comes to modifications.

Bank of America processors tell me that they get 120,000 “requests” per day. To get down to issuing a modification, they take the longest of any lender or servicer that I have worked with. I typically have several clients who are in trial modifications for far more than the three month period agreed on. Bank of America just says: Keep paying and we will get around to you.

Further, Bank of America actively discourages clients from utilizing the services of an attorney or other third-party modification company. I believe this is bad faith action that could subject Bank of America to suit.

Bank of America claims to be willing to cooperate with those needing modification.

According to the Washington Post, J.P. Morgan Chase has modified 20 percent of its borrowers, Morgan Stanley’s Saxon Mortgage Services has modified 25 percent, Citigroup has modified 15 percent, Wells Fargo has modified 6 percent and Bank of America, probably the worst of all economic offenders (next to the unrepentantly greedy Goldman Sachs, that is) has modified a paltry 4 percent.

For those who do not qualify for a Home Affordable HAMP modification, Bank of America offers a forbearance plan, which capitalizes your arrearage, that is, adds it to the total balance, and then raises your payment, without lowering your interest rate.

If you do qualify for a HAMP modification, Bank of America says it can give you a provisional lower interest rate and payment provided you are more than 30 days late. Otherwise, if you are current on your loan, you are still eligible for a HAMP modification – other things being equal – but you will have to wait 60 to 120 days, during which time you will have to continue making your current payments unless you want to risk going into foreclosure.

Bank of America is one of the lender/servicers which took the TARP money from the Feds and therefore was obligated to offer HAMP modifications.

Bank of America has plenty of staff to originate a record number of new loans but not enough staff to handle modifications and so is making modification applicants wait longer than any other lender.

If a Borrower does not qualify for HAMP because his deficit is too large, Bank of America will try to qualify the Borrower under its own HOPE program. Under HOPE the monthly payment can be higher than 31% of gross income, and the interest rate might be higher than under the HAMP program.

After many months of waiting, a Borrower will generally be approved for a trial payment plan, where he will make payments for three months. Payments cannot be paid online. They can be mailed in by ordinary check or sent by Western Union. They are best paid by check over the phone.