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Prepared By: Melissa C. Marsh, Los Angeles Real Estate Attorney
Written: June 2009

With the rising tide of foreclosures, a growing number of consumers are being contacted by companies, or individuals, offering loan modifications - the chance to modify their loans as a last-ditch effort to save their home. A loan modification is an agreement between the homeowner and the mortgage servicer (lender in many cases) to permanently change one or more of the terms of the mortgage contract. Modifications can include lowering the interest rate, extending the term of the loan, adding missed payments to the loan balance, and in some cases a reduction of the principal balance.

Loan modifications have caught the attention of the state Department of Real Estate, which outlined some dos and don'ts in its Winter 2008 Bulletin. A red flag should go up, if the individual or company offering to perform the loan modification is requiring the payment of an advance fee. California Civil Code §2945 regulates foreclosure consultants. A foreclosure consultant, and anyone with a real estate license, is prohibited from collecting an advanced fee unless:

(1) the loan modification, or workout, is being attempted after a notice of default has been issued on the property; OR

(2) If a homeowner has not received a notice a default, the loan modification is being performed by a California licensed real estate broker who has presented the homeowner with an advanced fee agreement previously reviewed by the Department of Real Estate.

A loan modification should appear to be a reasonable compromise between the lender and the borrower and can result in:

1. A lower interest rate;
2. A longer term loan;
3. Accrued payments owed made a part of the outstanding loan balance; and in some cases,
4. A reduction of the principal balance owed.

To find out if you are eligible for a loan modification under the HUD guidelines, you can view the U.S Department of Housing and Urban Development’s Fact Sheet on the Loan Modification Option. Even if you are not eligible under HUD, don’t give up. You still may be qualified for a loan modification.

To get a loan modification through, typically the borrower must show a short-term change in circumstances that has created a financial hardship and in turn the inability to pay; or terms in the original loan that violate federal law. Before considering a loan modification, your lender will likely request a hardship letter. Some hardships that have been deemed acceptable by some lenders include:

Adjustable Rate Mortgage Reset
Illness
Loss of Job
Reduced Income
Failed Business
Job Relocation
Death of Spouse or C0-Borrower
Death
Incarceration
Divorce
Marital Separation
Military Duty
Reduced Income
Medical Bills
Damage to Property (natural disaster or act of God)
Other (Please Specify):

Sample Loan Modification Hardship Letter.

Your Letterhead
(Name, Address, and Telephone Number)

Date

Lender’s Name
Lender’s Street Address
Lender’s City, State Zip

Re: Request for Loan Modification on (your Loan #)

To Whom It May Concern:

I am writing this letter to request a loan modification due to the unfortunate set of circumstances (including the recent adjustment of my mortgage interest rate) that have caused me to become delinquent on my mortgage. Although I have done everything in my power to reduce my expenses and to make ends meet, unfortunately I have fallen short and would like you to consider working with me to modify my loan. My primary concern is to keep my home and I would really appreciate the opportunity to do that.

Although I have the full intention to pay what I owe, at this time I have exhausted all of my income and resources so I am now requesting your assistance to reach a mutually agreeable resolution that will enable me to avoid foreclosure.

The main reason I became delinquent on my payments (explain in less than 4-6 lines. Make sure you provide the approximate date your hardship began, whether it is permanent or temporary, and if temporary why you consider the situation temporary).

[If the hardship is temporary add this paragraph] My situation has improved because (reason here), but I still need a loan modification, which I believe would benefit us both.

I would appreciate if you can work with me on lowering my monthly payment, reducing the delinquent amount owed, and/or in extending the term of the loan so I can keep my home and also afford to make the monthly payments going forward. [If you have an adjustable rate, consider adding something like the following: Although I have made all of my monthly payments on time for "X" years, considering my current income, there will be no way I can afford the increased payments when the rate adjusts.]

I haven't been able to refinance because my property is now worth X% less than I paid for it, but I read somewhere on Fannie Mae's website that I am exactly the type of person that the President's plan was intended to help. Attached are my recent pay stubs showing my current income.

I really hope you will consider working with me and I am anxious to get this resolved to both our benefit.

Thank you in advance for your time and consideration.

Respectfully,

Borrower's Signature

The above letter is a sample letter, and should be modified to reflect your particular circumstances.

Here are some helpful Web links and phone numbers:

• Hope Now (1-888-995-4673) is a free service that offers HUD-approved counselors, and contact information for loan servicers.
• Fannie Mae Loan Modification and Foreclosure Prevention: 1-800-7FANNIE. You should also note that if your mortgage company informs you that your loan is owned by Fannie Mae, you may be eligible for an unsecured personal loan (HomeSaver Advance) to help you catch up on mortgage payments.
• California Department of Real Estate’s list of companies that have submitted and have been approved for advanced-fee agreements for loan modifications can be reached at: http://www.dre.ca.gov/mlb_adv_fees_list.html.
• Housing Help Now - National Foundation for Credit Counseling, a nonprofit with consumer credit counseling specialists, can be reached at: 1-800-750-2227.
• HUD – Guide to Avoiding Foreclosure
• Home Preservation Foundation at 1-888-995-HOPE can assist homeowners that are not delinquent yet, but may be unable to afford future payments.

Update.
By July 1, 2009 California foreclosure consultants must register with the state of California's Attorney General's Office and post a $100,000 bond. These new requirements will create a registry of foreclosure consultants operating in the state, which will allow California consumers to research and verify a foreclosure consultant before retaining their services.

Related Articles:

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• Tenant's Rights in Foreclosure
• California's Anti Deficiency and Short Sale Protection Laws

If you have a few simple questions, or would like the assistance of a California real estate attorney, please schedule a telephone consultation for just $129 by completing our Telephone Consultation Request Form and Melissa C. Marsh, Esq. will call you back at the time you select, or Send Melissa C. Marsh an Email.

© 2009 Melissa C. Marsh. All Rights Reserved.