California Mortgage Modification Updates

by tammy on July 9, 2010

After the collapse of the American residential real estate market in 2008, predatory “loan modification’ outfits became extremely popular. Frequently operated by now out-of-work mortgage brokers, the idea behind loan modification was that the loan modification “specialist” would negotiate on behalf of the borrower for a modification of the original mortgage loan to reduce the monthly payments owed. As the credit crunch hit and the recession began, many homeowners found themselves unable to make their monthly mortgage payments under the original terms and loan modification seemed like a good alternative to default and foreclosure.

The problem, of course, is that loan modification is virtually always detrimental to the interests of the lender because it means that they will either receive the money they are owed over a longer period of time, or – more rarely – the amount owed might actually be reduced. Since any loan modification is detrimental to the lender and the lender is under no obligation to accept a loan modification agreement, the only way this proposal could work is by making the loan modification proposal a better alternative than foreclosure for the lender, which in turn meant that the borrower would still be expected to make a substantial monthly payment regardless of the specific terms. Further, the borrower would have to fully document their financial position and illustrate clearly that if the lender failed to agree to a loan modification than either default or bankruptcy was inevitable.

Under these terms, many loan modification “specialists” were simply unable to get their clients any sort of loan modification, since if the cost of the modification was low enough to meet the requirements of many distressed borrowers, then foreclosure actually represented a better option to the lenders. The result is that many reputable companies simply stopped offering loan modification services except on a case by case basis where they felt there was a good chance of obtaining them. This left the loan modification industry in the hands of the scammers, who basically conned the borrowers out of fees and then failed to produce any results. The result was a national epidemic of loan modification fraud, described by the Federal Bureau of Investigation (FBI) as “rampant mortgage fraud climate”. In that the loan modification industry was new and unregulated at the federal level, it fell to the states to begin correcting this situation and California was one of the first to do so.

On October 11, 2009, California’s Senate Bill 94 (SB 94) passed into law and placed a whole series of restrictions on loan modification offerings in the state. Although fraud has continued, the California Attorney General’s Office has taken and aggressive stance against loan modification fraud and the California Department of Justice has posted a wide range of resources online for consumers (http://ag.ca.gov/loanmod/).  The most important point of the legislation was that no one could solicit any sort of upfront fees (regardless of the language or terminology used to describe these fees) in exchange for any sort of loan modification work or other foreclosure avoidance measures until the actual work promised was successfully completed. The law was extremely comprehensive and specifically closed popular loopholes such as demanding that the client post the money into an escrow account or calling the fees a “retainer” and the like. 

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