Mortgage brokers and loan originators have become curious in learning about loan modifications. When I ask why, they say that they’re hearing there’s good money to be made doing loan mods. What? Wait a second. I thought loan modifications were done by the lender for free.
More and more spam is popping up in my spam bin targeted at LOs and selling “loan modification referral programs,” so I decided to call one of these LOs after sending an email late last night asking for more information and receiving no reply.
This particular person goes by the title of ”mortgage planner.” On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out. The upfront fee charged to the homeowner is $3500. But the LO assures me that all the work is handled by attorneys, she says. The borrower’s up front fee is placed into escrow. If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due. If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not. I asked the LO why a homeowner wouldn’t just work directly with an attorney. She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.
I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep. Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.” She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.” If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.
In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers. A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client. All fees earned must be disclosed to the consumer. The fact that this mortgage planner/LO felt uncomfortable discussing his portion of the $3500 and the actual work performed is a big red flag.
Loan modifications are performed by a lender with no fee to the homeowner. HUD-approved Housing Counseling Agencies perform loss mitigation/loan modification services for free. These agencies are supported by our tax dollars.
I suppose the argument is this: “Well the loan servicing departments are really busy and by paying our $3500 fee, you have a 93% chance of getting your loan modified.” But doesn’t the homeowner still have that same 93% chance going at it alone or with the help of a housing counselor?
If I had $3500 to spend, then I think I’d rather spend the whole $3500 on legal counsel, instead of just $1500. How many homeowners headed toward foreclosure have $3500 to be paid up front? One of the hallmarks of a sham operation listed on the FDIC website is if a lender requires an upfront fee, before any service is performed.
Loan originators, a fee for services rendered is fine, but what are those services being performed? This particular person shows zero experience in loan modifications and admitted to me that the attorneys are doing all the work. Is “gathering papers together” worth $2,000? A fee earned that is not commesurate with services rendered has been catagorized as an illegal kickback via RESPA’s Section 8. Loan Servicing companies are also subject to the provisions of RESPA. All lenders are subject to RESPA whether or not the LO owes fiduciary duties to consumers. Any amount over what’s considered normal and customary for services rendered is considered a junk fee and subject to challenge.
Sigh. I suppose we need to consider that we’re coming out of a mortgage orgy where LOs actually did just gather together some papers, threw them on the processor’s desk, and picked up a fat paycheck. Why wouldn’t they believe this could be their ticket back to the good old days?
Loan Originators, before you begin earning these referral fees for basically doing nothing and handing the file over to an attorney, consider what would happen if the homeowner did not feel that he or she was well served.
Your regulator ends up with a phone call, which turns into an investigation. Perhaps you’ll end up having to refund all those fees back to the consumer. It could happen.
Loan originators, my advice is to refer your financially distressed homeowners to legal counsel and free HUD counselors. Loan modifications are performed free of charge by lenders.
As a fiduciary, is it possible to justify charging anything above zero when you know free services are available for your client?
Okay all you banker types. Help me analyze this trend. If banks/servicers are offering upwards of $3500 to outsource loss mit/loan mods, that can mean several things. It surely means that a large percentage of these people who are receiving a temporary interest rate freeze on their ARMs will be back in 3 to 5 years with their hand out again, asking for another loan mod; IF they even make it that far. 40% of recent loan mods have already re-defaulted. Random, desperate loan mods without common sense underwriting means we’re just pushing this whole mess further down the road, delaying the eventual recover until many years into the future.
Apparently one of these companies coming to town in September to sell this system to LOs immediately following the WAMB convention. They’re charging LOs a pretty hefty set-up and monthly fee to participate in their referral program. Someone is definitely getting rich quick off of desperate LOs.
If you’re interested in learning what it really takes to process loan modifications, I’ve been teaching Realtors how to successfully negotiate Short Sales for 8 years. Attend one of NAMF’s Short Refi classes (yes, this is approved for CE credits) and you’ll get a better feel for if loan mods are worth the time and effort.
After reading all the blogs around the internet, attending free counseling seminars, attending free training seminars. I have come to a conclusion that there is no such thing as “FREE SERVICE”
here is why:
1.) a lender/mortgage servicing company has a fiduciary duty to their investor or their own mortgage portfolio and that is to collect the interest at the highest level possible.
The new affordability home program that passed compensate these group of people to do the very same task that an attorney or a legitimate load mod company would do with a fiduciary duty for their investor. Do you think it is in their the best interest to give the homeowner a very good loan modification program? Where does these money come from? It’s going to come from your tax dollars and your future children and grand children’ tax dollars! lolz. So is it really free?????
2.) All these housing counseling agency out there that actually help homeowners to get loan mod done for free. Where do you think they have the money to pay for themselves and the employee? Most of them are granted by the government if not sponsored by the lenders. Where you think these money coming from??? It’s going to come from your tax dollars and your future children and grand children’ tax dollars! (Although, there are a lot of volunteers out there for a return of other services) So is it really free?????
3.) There are indeed a lot of scam commpany out there who claim to be working with attorney or experienced in loan mod and promises big and deliver nothing. Does that mean everyone who is in the business are the same? No. There are quite a lot of good loan mod company with reasonable fee and delivered good result to homeowners and they are satisfied. If every of these company do it for free, where would the money for them to pay for their employee, expenses, etc? A service is done and you can either do it your own or u hire someone whether you pay or you ask for money from the government. There is no SUCH THING AS FREE SERVICE. And if you do ask help from the government, expect to pay tax on it.
With the idea that the government is coming out, “if you pay-walk away” Then the idea of free market/capitalism is destroyed. With billion of dollars are being granted to these housing counseling, incentive going to the mortgage servicer/lender from the government. Where you think they get that money from???? Is it really free???
http://www.hopenow.com <== sponsored by the government. Of course it’s free. They are group of people who are hired by government to do your work with your tax dollars.
To have your loan mod done or anytime of products you want to buy for less that what it worth, you need to be aggressive with a negotiating skills. Not everyone has such a skill or can acquire it overnight.
To me, there is no such thing as free service. You either pay it or you go get it from the government which in turn tax you, your kids, your grandkids, your great grand kids and giving up your rights, your freedom, your free market where service is provided and a fee must be paid.
Add on to the comment, Attorney cannot pay any referral fee to an unlicensed attorney such as a licensed lo/realtor cannot pay referral fee to any unlicensed lo/realtor. if there is, it has to be a very nominal fee. Therefore, any attorney splitting fee/commission with an unlicensed attorney is in violation of the code of ethnics per california
As a novice, what I still don’t know is: besides getting relief from the terms of the loan, what good is a loan modification to the consumer? What is the benefit to the lender other than hoping to not forclose to save a losing situation. The counseling I would guess is to coach the consumer on how to present their case to the lender. I also don’t get why you need an attorney to help sell your request for relief unless there is an implied threat of some sort of legal action for a possible flaw in the mortgage contract. This seems like a finacial planning issue to me. What is the smartest way for the home buyer to make the best of the situation. I understand that a lot of folks are at a big disadvantage in situations like this and really do need help. I guess the HUD approved counseling actually sounds pretty good after reading the comments. Lastly, I don’t like the idea of exploiting someones misery.
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
Loan originators have no business being in any position to help customers with loan modification other than free advice on where they can get help. There should be a completely separate approval for licensing to be a legal loan counselor. Then at best a fee for service of now greater than the actual cost of the counseling (Max $150). That is the fee that CCCS gets for providing counseling to first time home buyers thru Fannie Mae Online counseling portal.
But its bad to even think about heading that direction. So what’s next. Well I am sure you know now that since writing your blog topic that more and more programs are becoming available.
Now we have legal loan mods for mortgage brokers called the Fannie Mae DU Refi Plus or the Freddie Mac Relief Refinance. Where at least this is a legal way of helping out the client there are still big draw backs for the originator.
For example: Freddie Mae Relief refinance allows up to 105% LTV for the first mortgage, now you have to get the second mortgage to subordinate to the new first mortgage. I have yet to see anyone get that subordination approved with a CLTV over 110% of the value of the home.
In addition the fee allowed for this service is only $2500 and that has to cover all of the closing cost. Whatever is left then the loan originator can claim that as Loan Fees. So considering that you have to pay title, Escrow, Appraisal, Credit, 4506-T processing, Impounds and recording fees – I can only see about $500 – $600 left for a loan fee. Is that enough? I guess if that is all you did is those type of loans and you could get all of them approved but that is tough in this market.
But it at least covers the fiduciary duties of the loan officer. You can do that in the loan mod business.
93% chance of getting your loan mod approved? I saw you write that but that doesn’t make any sense to me. How about a 7% chance that it will actually happen. That is more like it. Even the numbers put out by Hope Now don’t even show that much of an approval rate.
You also talked about the re-default rate. I think that the latest estimates are more like 50% but that really is not a good batch to review from because those early modifications were done without proper verifications.
Now with Mod in a Box by the Fed you have to show proof that you can make the payments. That will really trim down the re-default rates. Obama’s plan is to allow modifications but only if they truly qualify. Now hopefully more servicers will actually run the numbers. Instead of just printing the Modification Docs.
But back to your point. No loan modification referrals are not acceptable for a Fee for Service. The loan originator has a fiduciary responsibility and the obligation to work on behalf of the client. To preform a service that will actually work for the client. Loan originators only get paid when the loan the client picks out results in a successful funding of that loan.
What the servicing business needs is a better way to present that message to their clients so they don’t have to seek out other methods to get help with their loan.
Check out this new service for loan servicers and government non-profits:
http://www.mortgageworkoutcenter.com
This is just adding another layer of greed in an already messed up system. They should not even be allowed to operate. They are not a professional but giving legal and financial advice best suited to fill their own pocket.
“Loan Modification Fees: Is it Justifiable for a Fiduciary to Charge for a Free Service?”
It is justifiable to charge, but obvisouly it is not ethical. It is justifiable because the LO, or “mortgage planner”, is offering their professional services to help in the re-mod process. In plain english, the LO is their to “speed” things up with the Lender. It might be frivolous assistance but justifiable if the client wants the help and is aware that they are paying for something they can get done for free but at a much slower pace. Even if I do not agree with the LO’s rediculous high fee, it comes back to the consumer not wanting to wait to do the re-modification of the mortgage. I wish the clients got better advice, and I wish the LO’s gave better advice. I am built on referrals and do a great ethical job because I like to sleep at night, but I also want to know in the end I helped someone. The LO’s doing this are only helping themselves to a paycheck unearned. They will get weeded out like the rest as we slowly build toward a better regulated industry. Thanks for the solid article Jillayne! John
Jahila,
I know you really don’t believe what you said, about people being smart enough to do their own modifications. I’ve modified loans and the client receives the mod package and the lender recinds the offer because it was done incorrectly or not in time, or I spend hours with clients going step by step. Remember these were mods that were already approved!!
I am a homeowner who learnt the hard way about mortgages. I enjoyed reading your post which will help homeowner with their mortgages problems. Which is always a good thing.Most reputable big mortgage companies/servicers do not charge to modify a mortgage to a lower payment. The best way to get a free loan modification is through one’s own mortgage company or mortgage servicer. I also blog and write to provide enormous free information to help other mortgagees in trouble.
I recieved a Alternative Loan Modification from PNC Mortgage. They want $6523.00? as cash from borrower? I also recieved Pay coupons. Does this mean Im approved?
Hi DDD,
Thanks for stopping by NAMF. An Alt Loan Mod sounds like something different compared with a standard loan modification.
In terms of wanting cash up front, maybe when you sent in your paperwork you showed a lot of cash on hand.
Without seeing any paperwork, I’d guess this sounds more like a forebearance instead of a loan modification.
Maybe the upfront cash represents the back payments plus interest and penalties.
Read the paperwork carefully. The answer will be in there. If you are still unsure, google your state’s bar association and find out if there is free legal aid available in your state and county so you can receive a legal opinion.
You can also find a free HUD-Approved Housing Counseling Agency here
http://portal.hud.gov/portal/page/portal/HUD/i_want_to/talk_to_a_housing_counselor
look for agencies that offer DEFAULT counseling. They will help you understand your paperwork for free.
On The Paperwork It states Alternative Modification?
It states
Funds Needed to Advance escrow,
Lawyers fees, ECT. Also My Mortgage is going from $89000 to $94,000
Also It came with pay coupons starting On October 1st. It becomes effective 8/1/2010 But I have until 8/13/2010 To accept. Also September payment is included in the $6523.15 amount. My Interest is going from 6.87 to 5.3 One More thing they tacked on 1 more yr to my 30yr mortgage
Okay, this sounds more like a forbearance and repayment plan instead of a formal loan modification. They’re just naming it “alternative.”
They’re tacking on the missed payments to the mortgage amount and extending the term by 1 year and they’re also offering you a lower rate.
Are you going to take it?
Yes, PNC States it is the best option availible, I have the funds on hand. I cannot afford to wait any longer. I started this process in November, I applied to Obams Making homes more affordable program. I made the 3 Trial payments. In Febuary I was told I made over the 31% to Quilify, That put me behind 6 months on my mortgage. My wife lost her job, I had to Resubmit all the paperwork again. On July 7th They stated I did not Quailify because of the 31%. In other words I make to much cause I have 2 jobs.I can afford the mortgage but did not have the funds to catch up.I do not want to prolong the process. I have all documents signed and Cashiers Check ready.I just dont want to get the runaround again
It sounds like this is going to work for you. If you have the funds available and you are comfortable with the new monthly payment meaning, it’s low enough so that you will likely NOT re-default again barring any catastrophic event, then it sounds like you’ve made your decision! Congratulations and feel free to stop back by and let us know how you’re doing in the future. We care.
Thanks for your help, 1 more question, How long does this take? I already have the payment coupons?
When is the first payment due according to the payment coupons?
1st payment for September 1st but is included in the $6523.My 2nd payment will be due on October 1st. Im just worried something will go wrong.Do they contact you after they recieve the paper work and funds, Or should I assume all is final and I should send my 2nd payment on October 1st
Save all written correspondence and follow their instructions. Do exactly as is written. Assume they will not contact you after they receive the paperwork and your check and send in the second payment as scheduled. Congratulations!