Another Modification Nightmare Story

It seems like every week there is at least one new story about a homeowner who has signed up for a mortgage modification through one of the federal government programs and ended up worse off than they were before. Here is another one of those stories.

The Weddles of Harris, Minnesota recently fell into financial troubles and they were unable to make their mortgage payments. When Chase, their mortgage lender, offered to reduce their mortgage payments by 20 percent, the Weddles were excited. That was back in November 2009 and the cut was a result of a trial mortgage modification. Sounds like a great deal, right?

Almost a year later, the Weddles were informed that they were denied for a mortgage modification. As a result of the denial, the Weddles would have to pay their back mortgage payments for the 10 or so months that they were in the trial modification. The total of that bill was almost $25,000. They needed to pay that right away to bring their mortgage current. If they couldn’t do so, they were in danger of going through foreclosure.

The Weddles were completely shocked. After all, they had paid their reduced mortgage payments on time each month. It was the bank that offered the 20 percent cut under the trial modification and the Weddles were doing everything they were supposed to do under the terms of the modification. As a result, the Weddles were deeper in debt than ever before.

Chase states that homeowners are giving clear warnings and disclosures about the possibilities of getting denied for a permanent loan modification. The lender says that the homeowners are also told about the possibility of the lump sum that could be due if they are denied for the modification. Unfortunately, the Weddles’s story is one that continues to happen despite the warnings and disclosures.

In addition to demanding a lump sum payment if the modification is denied, the trial modifications also ruin the homeowner’s credit rating. This is because a modified mortgage is typically classified as a “mortgage in default” regardless of the fact that homeowners often make their modified payments on time every month. For each month that the mortgage is in the modified stage, it is marked as another defaulted month on the homeowner’s credit report. This makes the modification a Catch 22 because it would be extremely difficult for a person to move out of their current home and get approved for another mortgage with these dents and dings on their credit report.

Only about 12 percent of homeowners who are delinquent in their mortgage payments have received permanent modifications under the government’s HAMP. While this program has helped a few hundred thousand people avoid foreclosure, it has fallen drastically short of its original goal of helping between 3 and 4 million homeowners who need it. Is there a better solution?