Loan Modification Example and Why It Failed

We recently helped our client Alex with a loan modification. Here is the situation, numbers and why it was declined by Countrywide, the 1st lender.

Alex built a house a few years ago in West Sacramento and invested about $50,000 of his own money. The rest was financed with an Adjustable Rate Mortgage (ARM).

Adjustable Rate Mortgages were popular a few years ago but not so much today. They call these loans a "ticking time bomb" because the payments are low but only for the introductory period of 1 to 5 years. Then the rate adjusts to whatever the market rate is (up!).

It's not uncommon to see payments jump by several hundred dollars of more. That's what happen to Alex. His introductory fixed payments where around $1500 per month and then jumped to over $2500 per month.

Alex's business also took a hit and he is making less money than when he first built the home. Alex can't afford the payment anymore so we helped him call his bank for a loan modification. As part of the loan modification the bank asks for a list of current income and expenses.

Alex is married and has 4 kids. Here is his monthly financial picture:

Income:
+ $3,800 income from his business

Expenses:
- $425 business insurance
- $800 business expenses
- $200 auto gasoline
- $58 auto insurance
- $150 life insurance
- $120 electric bill
- $140 cell phones
- $46 home phone
- $72 sewer/water/trash
- $350 credit card payments
- $ food and other expenses??
Total: $2,361

Net left over to pay mortgage: $1,439

As you can see Alex can barely afford the original fixed mortgage payments, and the numbers above don't even including his food and miscellaneous expenses.

What the bank said:

After submitting the financial statement and proof of income the bank took several weeks to respond with an answer.

Waiting a long time is typical as many people are trying to adjust their loans or short sale their homes during this time of economic hardship. The loan modification / loss mitigation departments of most banks are quite busy. Patience is necessary along with frequent follow up.

Bank's answer:

Sorry but you don't have enough money left over at the end of the month for us to even consider a loan modification.

Well, based on the numbers above that makes sense. Not a big surprise. At least Alex feels good that he tried. If you do your own loan modification it doesn't cost anything to try.

Next step:

Short sale the house to avoid a foreclosure and preserve credit.