Loan Workouts - Modifications
Michael T. Chulak & Associates a Law Corporation
provides legal representation to clients seeking to modify residential and commercial real estate loans.
Loan modifications or loan workouts may include any or all of the following:
- Reduction of the principal balance including late charges and fees.
- Reduction of the interest rate.
- Conversion of an adjustable rate loan to a fixed rate loan.
- Extending the term of the loan in order to reduce the monthly payments.
- A temporary forbearance on the part of the lender where the lender agrees to cease its foreclosure action
Frequently Asked Questions - Loan Modifications
Q. Why do real estate
lenders generally agree to modify loans?
A. Lenders agree to modify loans because they become convinced that it is in their interest to modify a particular
loan rather than foreclose and sell the property. Our job is to convince the lender that the proposed modified loan terms are
Q. How do you convince a lender that it is in their interest
to modify a loan rather than foreclose?
A. By pointing out the very specific details of how each alternative will effect them.
Q. Can a non-attorney represent us in negotiating a loan
attorneys can practice law, provide legal advice and file lawsuits. An experienced, knowledgeable and
creative attorney can nearly always be more effective in convincing a lender that they should modify their loan.
Q. Can you guaranty us that you will be successful in
obtaining a loan modification if we pay your fee?
A. No one can guaranty that a lender will modify its loan. While we expect lenders to act in their best interest, we
cannot guaranty that they will do so. Sometimes lenders make the mistake of foreclosing, costing their shareholders and
sometimes the taxpayers of this nation thousands of dollars. We can only represent to you that we will be diligent and will
use our knowledge, experience and negotiating skills to the best of our ability.
Q. Should I continue to make my real estate loan payments while you negotiate
with the lender?
Mortgage lenders have absolutely no incentive to modify a loan that is current (not in default).
Unless the borrower stops paying, we are likely to be unsuccessful in obtaining any material concessions from the
lender. If you continue to make your monthly payments, the lender will conclude that you will not risk a
foreclosure and will continue to bleed you dry.
Q. Do I risk having my property foreclosed if I stop making the monthly
A. Yes. If you stop making the payments and the lender refuses to modify the loan, you will lose the property to
foreclosure (unless you reinstate the loan prior to the foreclosure by paying all delinquent payments plus all foreclosure
related costs and late fees).
Remember, in order to get the best terms from your lender, the lender must absolutely believe you will let the
property be foreclosed absent an acceptable loan modification.
Q. Can bankruptcy stop a foreclosure?
A. Yes, but only for a few weeks at most.
Q. Does your law firm offer tax advice in connection with loan modifications?
A. No. This is a specialized area. We strongly recommend that you obtain the advice of a licensed California CPA to
determine whether or how a loan modification will affect your tax liability.
Q. Does your law firm provide no cost initial
Q. What is reasonable to expect from my lender in terms of a
A. It is reasonable for the lender to reduce the principal balance of the loan to the fair market value of the
property and to adjust the interest rate and term to reflect current market terms. A lender that modifies a loan to reflect
these terms will definitely net more dollars than will be received from a foreclosure sale.
Q. Is purchasing a foreclosed property risky?
A. Yes. Its similar to buying a car that has been in a serious accident. Buyers of foreclosed homes do not
generally receive the same disclosures required of other sellers and may be subjected to the risk that the property was
previously sabotaged or has hidden defects. Buyers of such properties have found drain and sewer lines filled with cement,
severed electrical wires, holes made in the roof and much worse. In short, its dangerous to buy a foreclosed home and buyers
of foreclosed properties rarely pay top price because of the risks.
Q. What risks do lenders take if they refuse to modify a loan
and decide to foreclose?
Prior to becoming an attorney, I ran the foreclosure divisions of several financial institutions. My
responsibilities included loan workouts or modifications, foreclosing on properties, managing the foreclosed properties
(including all repairs and maintenance and selling the foreclosed properties). I handled hundred of loan modifications and
foreclosed properties in the 1970's and 1980's. During this period, I learned why mortgage lenders are better off reasonably
modifying loans rather than foreclosing.
First, the direct and indirect costs of foreclosing on a property are substantial and include the following:
- Trustee's fees and costs
- Advertising costs
- Real estate commission (4% - 7%)
- Title insurance and escrow fees (1%)
- Opportunity cost or loss of interest on investment
- Cost of normal repairs
- Normal maintenance, cleaning and property management costs
- Utilities (water and electricity)
- Real estate taxes
- Security, alarm monitoring
- Homeowner association fees, including fines and special assessments
- Cost of lender's employees
- Landscape maintenance
- Pool repairs and maintenance
- Vandalism of property. While illegal and highly unethical, I have seen instances of the following scorched earth
conduct by desperate and revengeful people:
- Concrete poured into plumbing fixtures and drains
- Removal of plumbing fixtures, electrical fixtures,
appliances and cabinets
- Removal of carpeting and screens
- Removal of air conditioning - heating equipment, garage
door openers, doors and pool equipment
- Destruction of irrigation systems and landscaping
Other Lender Costs
- Given the laws of supply and demand, every foreclosure in every community drives the market value of the other homes
in the community down. In short, when a real estate lender forecloses instead of reasonably modifying a loan, it contributes
to the destruction of the market for the assets they own.
- The lender will avoid possible adverse publicity resulting from newspapers, radio stations and television
reporting the horror and tragedy of another unreasonable foreclosure.
- The lender will avoid the possible criticism from shareholders, federal and state regulators, government agencies
and politicians asking why the lender foreclosed when it could have saved money by reasonably modifying the loan to reflect market
- The loss of good will in the community. The reputations (and net worth) of lenders can be destroyed one
unreasonable foreclosure at a time.
- Capital impairment, with all that results, including a decline in the value of the lender's stock.
- Employees of financial institutions who are costing their employer - lenders money are losing their jobs for good reason. Remember,
every day a lender is unrealistic or unreasonable means greater losses for the lender, the shareholders and possibly the tax payers.
Q. Do mortgage lenders ever ask for concessions before they modify a
A. Yes. They will often bury many things in the fine print if you are not careful. Often they will ask that you
release them from liability for any prior wrongdoing and waive the right to a jury should you ever file suit against them in
the future. In addition, they will often add fees on to the "end" of the loan to cover their attorney's fees and costs. These
may be substantial. The list of possibilities is limitless which is why you should be represented by competent legal counsel.
Q. My lender insists that I must make at least one more loan payment to show good faith. Should I make the
A. We believe you must cease all loan payments while negotiating a loan modification. Remember, the bank or
other lender is not your friend. They simply want your money. They don't care about you or your family. Its all about
getting you to pay them.
Should I pay the property taxes while a loan modification is being negotiated?
A. No. So long as you don't exceed five years of non payment. Not paying will cause you to pay interest and
penalties if your loan modification is successful. If it is not successful, payment of the taxes will be money lost forever.
Q. Should I pay the
fire insurance on the property while a loan modification is being negotiated?
A. Yes, but don't pay ahead any longer than necessary.
Q. Why should a lender choose a loan modification based upon a loan equal to the
fair market value of the
property instead of a short sale?
A. Lenders are always better off with a loan modification where the loan is equal to fair market value of the
property than a short sale based on fair market value. With a short sale, fair market value is almost always less than fair
market value based upon a loan modification because the property will almost always be in a more distressed condition. In
addition, with a short sale, the lender must pay all of the costs associated with the sale. Choosing a short sale over a loan
modification will generally result in the lender incurring an additional loss equal to 10% to 20% of the fair market value
based on the rejected loan modification.
Is it possible or likely that my real estate lender will report the fact that I am withholding my mortgage
payments to the credit reporting companies?
A. Yes. It is both possible and likely. Many real estate lenders are acting vindictively by intentionally
harming the credit rating of their clients, if their clients act in their own best interest instead of the lender's best
interest. This common act of revenge harms the borrower but it also harms the lender by reducing the value and marketability
of the loan in the secondary mortgage market. A borrower with a poor credit rating reduces the value of the loan when it is
offered for sale. Notwithstanding the fact that real estate lenders are harming themselves in the process of injuring their
clients, many are more interested in trying to intimidate borrowers into paying than in restructuring a fair loan based upon
Q. My loan is being serviced by a company other than the mortgage lender. How does this effect a potential loan
A. It complicates things. There is often a major conflict of interest between the servicer and lender. If a
foreclosure takes place, the servicer is likely to earn substantial fee income. If a loan modification is completed
(therefore, no foreclosure takes place), the loan servicer does not earn substantial fee income. Generally, if a loan
modification is completed, both the lender and borrower benefit but the servicer does not benefit. As a result of this common
conflict, a trend is developing where lenders are now filing lawsuits against loan servicers for breach of fiduciary duty and
negligence. Employees of loan servicers must be aware of the legal liability that exists.
Q. I recently
requested a loan modification from my lender. They
immediately requested that I complete a new loan
application and provide them with income and expense
information as well as information on all of our assets.
Is there any danger in providing this information to my
Possibly. If your loan is in default and you are unsuccessful in
getting your loan modification after providing all of your financial
information, and the loan is a full recourse loan, the lender may
file suit against you to collect any amounts owing. Sometimes a new
loan application encourages a lender, with a full recourse loan, to
file suit, obtain a judgment, and then seize available assets.
Before submitting financial information to an existing lender, you
should obtain legal advice from an experienced attorney.
Q. If I list my house for a short sale, am I required to make a disclosure to a potential buyer?
A. Yes. If the loans and other encumbrances exceed the estimated net sales proceeds, you must disclose this fact to any agents involved in offering the property for sale, and any prospective purchasers. The fact that a property is “under water” is material to the decision to offer to purchase the property.
Q. What is a forensic loan audit?
A. A forensic loan audit or review is a detailed analysis of a mortgage loan file to determine whether the originating lender complied with all federal and state laws.
Q. Will a forensic loan audit help me obtain a loan modification or provide the information needed to stop a foreclosure?
A. Almost never. If your loan was originated by an institutional lender such as a commercial bank, credit union, or large mortgage banker, the odds are less than one in ten thousand that a violation of the laws governing loan originations will be found that is so material that it will help you. If your loan was originated by a private lender, the odds are higher but still against you.
Q. Can your firm perform a forensic loan audit?
A. Yes, but it is extremely unlikely that we would recommend that you spend your money on one. Unfortunately, there are many scammers who call themselves Forensic Loan Auditors, Certified Forensic Consultants, Mortgage Loan Auditors, or use other meaningless titles, who take advantage of highly vulnerable people by taking their money for superficial, worthless loan file review. Don't fall for a sales pitch when the odds are not even remotely in your favor.
Q. What if a loan audit turns out to be favorable?
A. Even if a loan file audit turns out to indicate a violation of the law, you must still prove that the violation was a cause of your harm. This almost always means filing a lawsuit that could take a year or more to get to trial. You must also be able to prove that the violation resulted in financial harm. Not all violations of the law by a lender are a cause of the borrower's harm.
Q. I became delinquent on my Wells Fargo mortgage loan because I lost my job. The bank took no action for more than one year while I struggled to find another job. I finally found a good paying job and then contacted Wells Fargo to discuss bringing my loan current. I suggested that they add the delinquent payments to the loan balance and that I would immediately start making payments at the higher amount based on the revised balance. The bank would not lose a penny and would actually earn more inertest since my interest rate was above market. Instead, after a year, they told me I had to pay every dollar or they would foreclose. I explained that I could not pay the past due payments at once but could start making monthly payments at the higher amount based on the above market rate loan. This would result in Wells Fargo avoiding a foreclosure and a loss. It would also keep me and my family in our home. They refused, foreclosed, and lost several thousand dollars as a result. They actually sold the home far below fair market value. The decision could not possibly be what was best for Wells Fargo. Do I have any recourse?
A. No. Based on your information, they had the right to do what they did even though it was a poor decision. Unfortunately, we regularly see banks such as Wells Fargo, Bank of America, Chase, and others foreclose on families when a loan modification would have been in the best interest of the bank, FDIC, taxpayers, and the family that lost their home.
Before Michael Chulak became an attorney, he was an executive with several large financial institutions in the 1970's and
1980's. During much of this time, he managed and supervised several foreclosure and loan modification-workout divisions for
these lenders. Thus, Michael Chulak understands the internal operations of real estate lenders and how to motivate them to
accept reasonable loan modification proposals. While no one can guarantee success in getting a lender to agree to a reasonable
loan modification, we believe we have the knowledge, skills and experience to maximize your chances of success. Michael is also a partner in the accounting firm of
Sandoval Chulak & Associates.
Please visit: Glossary of Real Estate Loan Terms, Short Sales and,
California Fraudulent Conveyance Act
Free Credit Repair
Bankruptcy and Foreclosure Statistics
The website USDebtClock.org displays real time statistics for bankruptcy filings, foreclosures, employment, unemployment, the national debt, the national deficit, the national debt per citizen, and much more. It is a wealth of information. It will shock you.
The information presented on this site was prepared for general information purposes only and does not constitute legal advice. It should not be relied upon as a substitute for consulting with a licensed attorney in your state. The law is constantly changing. In addition, the information presented may not be up - to - date or 100% complete. Our attorneys are licensed to practice law in California and seek to represent clients only in California. Sending us an email or other communication does not create an attorney - client relationship. Only signing a retainer agreement will establish an attorney - client relationship. This is an advertisement.
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