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Private Lender Problems

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Posted On: 09/30/2009

Q: I have looked into getting a loan modification. I qualify, but since I have a private lender, I’ve been told by several companies that private mortgage owners do not have to modify my loan. Is this true, and if so, why are private lenders not covered by the new laws?

A: A mortgage is a contract. To modify a contract you must have the agreement of all parties. If a lender does not want to modify a mortgage to lower rates and costs then you’re out of luck.

Imagine if one party to a mortgage could change the terms without approval of the other. Imagine if that “one party” was the lender. That’s been the case with credit card debt and look what’s happened before credit card reform was signed by President Obama in May. Lenders could – and did – instantly raise rates at any time they wanted.

In the same way that borrowers have rights, so do lenders. A fixed-rate conventional mortgage, a VA loan and FHA-backed financing are as fair as loans get. But many imprudent loans marketed during the past few years produced instant fees, rising share values, huge executive bonuses and big tax revenues from increased home sales. Toxic loans and their related securitization sowed the seeds for today’s financial crisis.

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In recent years the financial system has become tilted and one-sided. Mortgages with strange and dangerous terms, such as option ARMs, interest-only mortgages and loans made with stated-income mortgage applications became common after 2002. The Federal Reserve – which since 1994 has had the authority to define toxic loans as “unfair and deceptive acts or practices” and therefore ban them – did nothing and did not protect the public. The so-called “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” greatly reduced the ability of borrowers to first go to court and to then gain relief. Federal regulators have used the National Bank Act to effectively stymie state bank regulations that could have prevented many of the mortgage abuses of the past few years. And when was the National Bank Act passed? That would be in 1864, a time when the size and complexity of today’s financial system were entirely unknown and the Civil War was still being fought.

As the Office of the Comptroller of the Currency – a major bank regulator – has explained, the National Bank Act “generally forbids any assertion of visitorial authority by state officers to supervise or examine national banks and prohibits state authorities from inspecting the records of national banks or bringing enforcement actions against national banks, except as specifically authorized by federal law. Under federal law and OCC regulation, the operating subsidiaries of national banks are treated the same as the bank itself.”

Of course, if state regulators cannot look at bank records or bring enforcement actions against national banks or their subsidiaries then they have very little real power. This summer, however, the Supreme Court in Cuomo v. Clearing House Association, L.L.C. said that state regulators could oversee certain bank activities. The result is that we may see better bank regulation in the future.

So, no, your lender cannot be made to modify your loan. That said, let’s look at some options.

First, if your lender won’t change your terms, see if you can refinance with a different lender.

Second, the government’s Home Affordable Refinance Program originally allowed borrowers whose first mortgage did not exceed 105 percent of the property’s market value to be considered for refinancing. Over the summer that standard was raised to 125 percent, meaning many more people can potentially qualify. Go to makinghomeaffordable.gov for information.

Third, if you’re facing foreclosure the lender might prefer to modify the loan rather than face bigger losses if the home is lost. See if you can get free legal assistance from community housing organizations, local law schools and state bar associations. Contact your state attorney general to see if there are any programs that might be able to help. If you have mortgage insurance ask your MI company about their “claim advance” programs.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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