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Lawyers ‘n’ Loans

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Posted On: 08/13/2008

Q: What, if any, role should a lawyer have in a loan modification business? As an attorney, I’ve had two inquiries from individuals who are planning their own loan-modification companies. They asked if a lawyer was necessary to do loan modifications. If so, they plan on using my services.

A: Securing a loan modification from a lender is a difficult process if only because in most cases the party we identify as the “lender” is really a “loan servicer” who administers the mortgage under instructions from the actual loan owner. Who is the actual owner? There is some debate regarding this question because today loans can be closed and sold within hours – and then sold and re-sold with electronic speed.

In addition to the usual benefits any new business obtains from working with an attorney, in the particular case of a loan-modification service it would surely be wise to know the rights and remedies available to borrowers in your jurisdiction, to be able to perfect agreements with lenders and to assure that the new company complies with all rules and regulations. The bottom line: I would see the use of an attorney as essential for the type of business being proposed.

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Here’s why:

First, in some jurisdictions borrowers have far more leverage than in others because of new state rules regarding foreclosure processing. Several states, for example, have recently extended the amount of time required for a foreclosure by as much as 135 days, meaning that lenders might be more willing to negotiate a modification rather than face the now-higher potential costs of a foreclosure. In some jurisdictions it may be possible to settle all obligations with a lender by simply selling a home because state rules prohibit any further lender claims against a borrower – even if the lender has a massive loss.

Second, there are no standard loan modification agreements, thus from a borrower’s perspective it becomes important to assure that a modification is fairly written. For instance, if the borrower can get a lower rate then how long will the reduced rate last? Has the borrower given up any rights to get the modification?

Third, a number of states have enacted tough regulations to prevent abuses by “foreclosure rescue specialists.” Some of this legislation is very broad and should be reviewed with an attorney before plunging into the loan modification business or purchasing from owners who face foreclosure.

Given that a mortgage is a contract between a borrower and a loan owner, it may well be that borrowers are best served by simply going to a local real-estate attorney rather than a third-party service provider, but that’s a different discussion.

Q: I’m a real-estate broker with a live client who has money and wants to buy a property. The property my client wants to buy is owned by someone who will likely be foreclosed in the next few months. We have spoken with the lender regarding a short sale but they have not gotten back to us for two months.

A short sale will mean a loss to the lender, but in this market a foreclosure will mean a much bigger loss. Why doesn’t the lender at least make a counter-offer?

A: Since the Depression, lenders have had few foreclosures relative to a huge numbers of outstanding mortgages. Typically a foreclosed home that did not sell at auction in the past could be quickly re-sold, often without a discount.

Today’s market is radically different. The huge volume of foreclosed properties means that many homes cannot be sold without a substantial lender loss.

A short sale is a loss for the lender and that’s hard to swallow – especially since the lender would not pocket any additional profit if the home’s value increased. To lenders, short sales are one-sided, perhaps the best of a bad situation but a bad situation nevertheless.

Many lenders today simply do not have the staff to handle large numbers of short sales. This can be the reason for slow responses – and no responses.

Also, it may be that you’re not dealing with the loan owner. Instead you may be in contact with the “servicer.” The servicer must follow the lender’s instructions and those instructions may limit or preclude the servicer’s right to accept a short sale.

Speak with your contact at the “lender” and ask about the mortgage owner’s instructions. Find out what’s possible, what isn’t and what authority the lender has to accept a short sale. If your contact cannot answer such questions, ask who can and speak with the actual decision-maker.

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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