You Can Save Money by Not Making Mortgage Payments

First of all, while you are engaged in the modification application process, you won't be expected to pay your mortgage. (In fact, if you are paying your mortgage, many banks will refuse to entertain your modification request on the ground that you obviously don't need it. Talk about a Catch 22!) And as long as you do your part in the modification process -- which means completing and sending all requested paperwork -- most lenders will suspend any foreclosure proceedings they have already initiated.

Delays in the Process Means More Time In Your Home, Payment-Free

If you have decided to use delay as a money-saving tactic by living in your house payment-free as long as possible (see The Foreclosure Survival Guide, by Stephen Elias (Nolo), Chapter 9), misplaced paperwork and repetitive requests for certain documentation will contribute to the delay and provide you with an opportunity to save another couple of months (or more) of mortgage payments. While some lenders may decide to push forward with foreclosure even while they are negotiating with you, most won't. If your modification efforts ultimately fail, but the process takes six months (during which you don't make mortgage payments), your net savings may  be greater than if you received the modification in the first place.

Of course, for people who desperately want to keep their homes, money saved during the modification process won't keep you in your home (assuming you ultimately fail to get the modification you need). But if you are resigned to leaving your home sooner or later, a long and messy modification process gives you time to amass a not-insignificant amount of money to find new shelter when it becomes necessary.

Some of you may consider me overly cynical for suggesting that you take advantage of the modification process in this way. However, as I consistently remind people, the home mortgage industry is run for the benefit of the investors and has never been known for its interest in the well-being of its borrowers, so there is no particular reason for you to be concerned about its health and welfare.

Next up:  How home modifications can help homeowners avoid an accusation of strategic default.

For these reasons, the second edition of The Foreclosure Survival Guide (which I wrote about the same time as the Making Home Affordable Program launched) strongly recommends that you hook up with a HUD-approved housing counselor to help you deal with your bank under its--and the Making Home Affordable--guidelines.

New Landscape: Not Enough HUD-Approved Counselors

Unavoidably, the number of people seeking assistance from HUD-approved housing counselors ballooned with the advent of the Making Home Affordable Program, and from all accounts HUD's housing counselor program has not kept pace. My clients have consistently reported that working with HUD counselors provides little or no advantage over working directly with the bank, and that counselors, like banks, lose paperwork and require redundant submissions over a long period of time without any tangible results.

Old Advice May No Longer Hold True

In short, my previous universal answer to people facing foreclosure ("call 1-888-995 HOPE and hook up with a HUD-approved housing counselor") may no longer be operative in all -- or even most -- cases. On the other hand, you have little or nothing to lose by starting with a HUD-approved counselor, provided you approach the relationship with a tad of skepticism. And my advice in The Foreclosure Survival Guide about not paying for modification help still holds. In most cases it won't help you to hire a lawyer or real estate broker to assist with your modification request. The fact is, too many people are seeking modifications for most banks to respond in any reasonable time frame.

• First, the program has erroneously depended on the good faith of the American mortgage lending industry, a mistaken approach for many lenders.
 
• Second, many people facing foreclosure lack an income stream to support even a radical modification.
 
• Third, even if good faith among the banking industry was widespread and unemployment wasn't so high, the Making Home Affordable program was still doomed to fail because of the sheer number of people applying for modifications. As a whole, the banking bureaucracy has not been up to the task of processing this flood of modification requests, which has resulted in many applicants giving up out of disgust and despair. 

To learn more about what happens if you own a house and file for Chapter 7 bankruptcy, see Nolo's article Your Home in Chapter 7 Bankruptcy.

From the time the foreclosure rates started skyrocketing, self-styled foreclosure-rescue operations landed on at-risk homeowners like locusts on wheat fields. When people still had equity in their homes, the operators of these scams would find ways to separate the mark from his or her home ownership -- supposedly as a temporary means of dealing with the foreclosure. It didn't take long for the home's equity to end up with the scammers and the homeowners to end up on the street.

As home values continued to plummet and homeowners were increasingly underwater on their mortgages, the foreclosure rescue operations turned to charging an up-front fee -- typically in the low thousands -- to replace their previous equity-stripping practices. When modification results were not forthcoming in the face of looming foreclosures, homeowners were told to be patient and that everything was on course. At some point, the homes would be sold in foreclosure and calls to the "rescue" company would go unanswered. 

Quick to respond to these obvious scams, many states have passed new legislation that, among other things, prohibited the collection of "foreclosure rescue" fees prior to the delivery of the service. In addition the Fair Trade Commission recently announced lawsuits in 23 states against perpetrators of these scams. Unfortunately, as is generally true with consumer protection legislation, lawyers have for the most part been exempted from their provisions -- and law firm ads on radio, cable TV and the Internet exhorting people to hire them to handle their modification activities have mushroomed.

Although I have no proof, the timeline of these developments tells me that at least some of these attorneys are simply fronting for the same companies that were scamming homeowners all along. But even if the attorneys are not fronting for foreclosure rescue scams, they might as well be -- as I point out below.

The FTC has found that some organizations that offer debt management plans (DMPs) have deceived and defrauded consumers, and recommends that consumers check their bills to make sure that the organization fulfills its promises. If you are paying through a DMP, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP. Once the creditors have accepted the DMP, it is important to:

• Make regular, timely payments.
• Always read your monthly statements promptly to make sure your creditors are getting paid according to your plan.
• Contact the organization responsible for your DMP if you will be unable to make a scheduled payment, or if you discover that creditors are not being paid.
  

To learn more about debt management plans and how to avoid scams, see Nolo's article Debt Management Plans.