Mortgage Modification – Bankruptcy – Creative Financing

Attorney-Based Mortgage Modification

Modification organizations fall into three classes. On the one hand are those who do it themselves.

Then there are the non-attorney-based modification firms. With them you do not talk with an attorney early in the process. You might not talk with an attorney at all. They advise you in writing that they are not giving legal advice and that you should not rely on them as your attorney, and in fact that you should consult with an attorney.

Some modification companies have an attorney in the background but not out front. Demand letters do not go to your lender on an attorney’s letterhead. You may never talk with the attorney. The attorney may never talk with the lender.

Such modification companies are pretty much out of business. The Federal Trade Commission enacted new regulations.

You can read my comment on the proposed regulations.

You can read the comments of other commenters as well.

And you can read the FTC’s final regulations too. Do a search for “Deal”. The FTC quoted my letter several times, although it did not quote my favorite arguments.

In a nutshell, the new FTC rule prohibited non-attorney mortgage modifiers from collecting up front fees. Non-attorney mortgage modifiers cannot be paid one penny until the lender offers a modification and the borrower accepts. That pretty much puts them out of business.

Attorneys are allowed to collect advance fees, however, they must follow state rules on how to handle fees paid in advance.

Attorneys are prohibited from “renting” their names to non-attorney mortgage modifiers.

Then there are law firms which do mortgage modification. That’s us. More and more attorneys are getting into the modification business.

You talk with an attorney early in the process. The letters which go to your lender are on an attorney’s letterhead. Because this work is paperwork intensive, your lawyer often hires a paralegal assistant. I hire my wife, and she is good at pestering the servicers weekely.

Mortgage modification is legal work and it should be done by attorneys. There are dozens of very significant legal issues intertwined with the modification process. Many people hire me because I can answer those legal issues. People need to be advised about the advantages and disadvantages of bankruptcy.

Having all correspondence come from an attorney has more impact. Have you ever gotten a letter from a lawyer and felt hot flashes? I’m an attorney,  and when I get a letter from a lawyer, hell, even I get hot flashes.

As an attorney, I look for legal violations the lender may have made. My demand to the lender is made on my attorney letterhead. I hurl accusations. I try to intimidate. The compromise achieved can be better.

The ultimate factors which prod lenders to agree to mortgage modification fall into two categories. The first is the simple economics of your situation. If the lender forecloses, it will have to pay foreclosure costs, for property management, for repairs, for resale costs, and for possible vandalism during the resale period. If the property is underwater, and if the lender forecloses, they will be able to resell it for no more than market value, so why shouldn’t they agree to reduce the mortgage balance to market value? They will net the same amount of money and avoid all the other costs.

The second factor which prods lenders to agree to mortgage modification is their possible legal liability for their violations of lending laws.

One of the things I do is take notes on the errors the lender makes during the modification process. These too can be used to sue a lender. Suing a lender for a violation of RESPA or TILA can be used to stop a foreclosure and put pressure on a lender to settle. Filing bankruptcy.

Bear in mind that your mortgage modification is a huge financial transaction. We are talking about lowering your interest rate temporarily or permanently, extending your amortization, and even lowering your principal balance. This could save you tens of thousands of dollars over the years.

Attorneys typically charge one percent of the loan amount to handle a modification. That is cheaper than doing a refinance. I generally charge a flat fee. More and more attorneys are charging by the hour, something I do in complex situations. In either case, spending a little more on an attorney modification might pay large dividends over the long haul. As my mother advised me: “Son, sometimes it’s better to pay a little more to get something worth keeping.”

Why can attorney-based modifiers better? Because the lenders know we can sue them. Therefore, they take us more seriously. We give the bank notice that they may be liable. We give them a deadline for turning over copies of the borrower’s mortgage file. We make a list of the violations of RESPA, TILA, and other federal laws. There are almost always violations, particularly with ARM loans and option ARM loans.

Yes, you can do your own mortgage modification. Most of my clients are people who tried doing it themselves. They got the runaround from their lender.  Or they realized that there is more to modification than they originally thought. Or they realized that they do not have the time to research modification and figure out the best way to handle this complex legal matter. They have other things to be doing. They decide to hire a specialist.

A law was passed in California which prohibited advance payment of fees to modification companies and even to modification attorneys. It is true that a lot of people paid advanced fees to modification companies who got nothing for their money. Abuses by attorneys, however, were rare. Further, when attorneys take clients’ money and do improper work, clients have the Bar Association to turn to.

Modifying a loan is the the practice of law. It is negotiating for a change in the terms  of a binding contract. To prohibit attorneys from charging in advance for their fees effectively prevents clients from hiring an attorney. Modification clients are already in financial trouble. After the attorney has done the work, he should not have to worry about collecting his fee.

There is an additional problem in collecting fees after the work is done: Some  lenders refuse to honor the position of the attorney (as well as the non-attorney modification company) in the modification process. Throughout the process lenders will tell borrowers that they do not need any assistance from third-parties. When lenders send out documents, they send them directly to the client, almost never to the attorney. When lenders need to communicate with the borrower, they almost always call the borrower directly, never the attorney. When the modification is complete, the final agreement is sent directly to the borrower, not to the attorney. The borrower might not even tell the attorney that his work has paid off. The attorney (or third-party modification company) who does not collect his fee in advance, may not collect a fee at all.

The systemmatic effort of lenders to cut attorneys out of the loop is unprofessional. Telling borrowers that they do not need an attorney helping them, is in itself the giving of legal advice and the improper practice of law by a non-attorney.  I believe that a lender who does this adds another cause of action that a borrower can use as basis for suit.

Martin Andleman has written extensively on the absurdity of prohibiting attorneys from asking for payment in advance. Click here.