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Our office frequently receives
inquiries from individuals who have heard about loan modification programs
instituted by the federal government. In most cases, the source of the callers’
information is an ad promising to qualify anybody (for a fee) for a loan
modification program. Many of these ads contain misinformation that this article
is intended to correct.
Background
When residential real estate values reached stratospheric
heights between 2004 and 2007, many homeowners and investors incurred
unmanageable debt associated with new financing, refinancing or adding home
equity lines of credit. Lenders irresponsibly threw money at borrowers, using
practices such as stated income loans, negative amortization loans, 3-2-1 loans,
adjustable rate mortgages and any number of other unsustainable catch-phrase
loans. This unmonitored frenzy created a perfect financial storm and ultimately
caused the severe real estate and economic downturn from which the nation is
still recovering.
In response, the federal government
rushed to bail out many lenders by covering their losses. Unfortunately,
Washington failed to require those lenders to use the bailout funds for the
purpose intended, i.e., to help distressed homeowners keep their homes.
That set the stage for the
government’s more recent programs geared to assist homeowners. The major problem
with these programs is that, constitutionally, the government cannot require
lenders to participate. Thus, having lost the opportunity to condition the use
of bailout money to assist homeowners, the government can now only encourage
lenders to participate.
A Trap for Borrowers
For example, the Home Affordable Modification Program (HAMP)
is a government program that encourages distressed homeowners to apply for
relief under guidelines issued by the U.S. Treasury. Many homeowners who tried
to apply for relief under HAMP were advised by lenders that, to be considered
for HAMP, the homeowners would need to miss some mortgage payments.
When the homeowners fell far enough
behind in their payments, their applications were accepted by lenders, who then
promptly ignored the applications and instituted trustee sales against the
applicants.
Many lenders will not return the
phone calls of borrowers who are current on their payments, since if the lenders
can continue to receive full and timely payments on their loans, they are not
motivated to change a borrower’s status.
Even if your calls were answered,
and loan modification applications were accepted by the lender, no action would
take place, since the person to whom you would speak would not have the
authority to modify performing loans.
Further complicating matters is the
federal government’s policy of allowing lenders to carry non-performing loans on
their books as performing loans, as long as lenders do not institute
foreclosures on those non-performing loans. The government’s rationale is to
artificially reduce the number of foreclosures and thereby mask the severity of
the nationwide real estate loan calamity. The lenders’ incentive is that a
reduced amount in their nonperforming loans reduces their requirement to hold
retained capital (cash required to offset bad loans). This frees up cash for the
lenders to use to produce other income, resulting in a cyclical Catch-22 in
which the government’s policies simply work against themselves.
Any effort by homeowners to seek
legal recourse for alleged violations of the HAMP guidelines by lenders was
destined to fail, since no private right of action exists under HAMP. In other
words, an underwater homeowner has no standing to sue a lender for violating the
HAMP guidelines.
This example underscores the fatal
flaw – i.e., unenforceability – of the government’s politically motivated
programs. Prior to taking action in reliance on any government program, remember
this HAMP example and seek professional advice. ● |
