People often try to get a mortgage modification before coming to my office to talk about bankruptcy.
Why do people try to get a mortgage modification?
They do this because a mortgage modification sounds like a great deal for those struggling financially.
- Isn’t the bank supposed to lower the payments and loan balance for debtors who can no longer afford their loans?
The answer is yes in theory, but no in practice.
Why don’t banks to help with mortgage modification?
The idea behind the Home Affordable Mortgage Program (HAMP) is that banks would work with borrowers to help them afford their homes.
This sounds great in principal, but in practice, it doesn’t work.
This is because the only way for banks to help people afford their homes is for banks to lower the balance on the loan.
Banks, however, refuse to do this, because lowering the balance means that the bank takes a loss. In order to mitigate the loss, or reduce the chance of the loss happening at all, banks might do things that are not in the borrower’s interests.
- ‘losing documents’
- ‘wasting time’
- proposing changes to the loan that are not good for the borrower
And to make matters worse, the banks can take months or even years to do anything.
This means the borrower is left with no certainty to plan their life and so often falls many months behind on the mortgage while waiting for the bank to make a decision.
What else do banks do?
One common modification that banks will make is to take arrears (past-due loan payments) and recapitalize them.
- Recapitalizing the arrears means that they are added to the end of the mortgage loan and accrue interest every month
If your lender does this to your mortgage, that means that you will be paying the loan longer, and paying even more in interest.
How is that in your best interests?
Why else is recapitalizing interest bad for borrowers?
Recapitalizing interest is even worse if the loan is for more than the value of the house, i.e. the house is underwater, because then the borrower can’t refinance or sell the house.
- Since housing values have been dropping for many years, lots of houses are underwater, and recapitalizing interest will only increase this problem
- If your have no equity in your home and can’t make your loan payments, a strategic default or Chapter 7 bankruptcy might be a better option
If you’re struggling financially and your bank isn’t being as helpful about your mortgage modification as you’d hoped they would be, then maybe filing bankruptcy might be your best option.
Talk with an experienced Minnesota bankruptcy attorney about how to coordinate a bankruptcy to get you the maximum amount of time in your house, or how to use a Chapter 13 bankruptcy filing to remove a second mortgage.
Simply call us at 612.824.4357 and tell us what you need us to do.