The first limiting factor in whether a servicer will offer a loan modification is based upon the concept of “Advances”. When a borrower misses a payment, the servicer must “Advance” that payment to the Trust to ensure the payment stream. Only at such time as the loan is determined to be unrecoverable can the “Advances” stop.
The only way that the servicer can recover the advances is one of three ways:
• Offer a forbearance whereby the borrower brings in money upfront for arrearages, then makes a few payments, and then brings in the rest due. (This is America’s Servicing Company’s initial offer.) Of course, if the borrower had that type of money, then they would not be in foreclosure.
• Check the Pooling and Servicing Agreement to see if arrearages can be “tacked” onto the end of the loan and the servicer can recover the advances upfront. If not, they foreclose. ( I have a copy of a Deposition that the servicer foreclosure expert declares just that.)
• Foreclose, and sell the property where they take the advances right off the top of the proceeds.
When the modification is requested by the borrower, the servicer will immediately check to see if there is any ability to recover the advances other than foreclosure. If not, they decide to foreclose. But, what is even worse, the servicer will engage in trial modification actions, usually providing a trial modification whereby the borrower will make payments to the servicer. These payments are less than what is owed, so they are placed into “suspense” whereby the payments are not credited to the account. When the lender denies the loan and forecloses, the payments are kept to offset the advances until the home is finally sold.
This benefits the servicer by allowing them to collect payments, and uses up time until the foreclosure can occur, but also denies the borrower the ability to hire an attorney to aggressively fight the servicer. Furthermore, it removes from the borrower money that will be needed to find a new place to live. (There is possible legal actions to consider which I will address further on.)
The second limiting factor is whether the servicer can in fact offer a loan modification to a borrower.
The Pooling and Servicing Agreement (PSA)
The PSA governs what can and can’t happen with regard to the servicing of a loan. It specifically details what can occur when a loan is in default or is facing default. Loan modification is one option covered.
Dependent upon the wording of the PSA, a loan modification may not be possible. It may not be authorized or it may restrict the ability to offer a modification by stating that such a modification may be offered, only if the loan is purchased back from the investor for the full balance due. Obviously, a servicer will not purchase back a defaulted loan that is “underwater” so they will refuse the modification, saying that the PSA does not allow for modifications.
The servicer knows immediately what the PSA says with regard to loan modifications. Do they immediately deny the modification? No, instead they engage in “sham” negotiations, requesting paperwork, financials and other documentation while wasting time until they can foreclose on the property. Often, they are accepting trial payments, knowing full well that the modification will be denied. Again, it is simply a way of recovering money.
What to do?
At this point, hopefully the reader and the attorney will begin to understand what I mean by Predatory Loan Modifications. I have attempted to show the issues with these modifications, and have spent several months attempting to determine an effective way to fight the servicers. Along the way, I have learned much, and I have also seen some actions filed against servicers, but because the attorneys did not understand the entire lending and modification process, gaping holes were left in the arguments.
The key to fighting the servicers on the modification issue is to attack the modification process, and show lack of intent to engage in a loan modification. In the case of Indymac/One West, you walk into court backed up by a PSA stating that the servicer could not do a modification without buying a defaulted and underwater loan from the lender. Then, you present a quote from Sheila Bair, head of FDIC, saying that Indymac PSA’s do not allow for loan modifications.
At that point, you are not done. You show the Deposition from an Indymac foreclosure expert that states their key determining factor is whether OneWest can recover “advances” from a PSA, and if it is not possible, they foreclose without regard for anything else.
Finally, you back up your arguments showing the communications between the servicer and the borrower, and showing that their modification actions were “sham” negotiations.
Oh, by the way, I have two court rulings, one in California and one being a 5th Circuit decision that states if a lender engages in loan modification negotiations with no intent to actually do a modification, it is fraud.
Read all here:http://blog.ml-implode.com/2010/05/predatory-loan-modifications/