Wells Fargo used to be a shining example of how a big bank should be run, but now they can not seem to stay out of the news for all the things they have done wrong. They recently revealed an error in their mortgage underwriting software that resulted in hundreds of denied mortgage modifications for borrowers who were facing foreclosure. The error affected some mortgages that were foreclosed on between April 2010 and October 2015. The error created a miscalculation of attorney fees that were used to determine if a borrower qualified for loan modification.
The error resulted in some 625 customers being denied modification and out of those customers, some 400 of them were foreclosed on after being denied. Wells Fargo has set aside $8 million to use as remediation for the customers who were affected by the error. While this may seem like a lot, it only equals out to $12,800 per customer, hardly adequate compensation for losing a home.
Loan Modification Benefits
If a homeowner is unable to make mortgage payments, there may be significant benefits to obtaining a loan modification. There are a variety of ways that a loan can be modified, and there can be benefits to both the borrower and lender.
- Extended Payment Terms: One advantage to a loan modification can be reducing your monthly payment without changing the interest rate or principal by simply extending the term of the loan. While you may not like paying on your home a few more years, it is still better than a foreclosure.
- Reduction in Interest Rate: In some cases, your lender may be willing to reduce the interest rate, even if temporarily. This can help you through a financial crisis, but the interest is typically added to the back end of your mortgage.
- Principal Forbearance vs. Principal Reduction: While these sound similar, they are two different things. Principal reduction is when the lender reduces the amount of principal owed without the expectation of repayment. Principal forbearance is when the lender forgives some of the interest on a portion of the principal. You will still pay it back to the lender when the property sells, is refinanced, or the loan matures.
Loan Modification Drawbacks
Although there can be significant benefits to a loan modification, there can also be some drawbacks.
- Impact to Credit Score: A loan modification can sometimes have little or no impact on our credit. It really depends on how your lender reports it to the credit bureaus. However, if you have missed payments, these will still impact your report.
- Legal and Processing Fees: You may find that there are some fees involved in the completion of a loan modification. These will usually be added to the principal of the loan.
- It May Be Taxable: If the lender reduces the principal of your loan, you may be liable for paying income tax on it. In most cases, this happens with investment properties rather than primary residences.
- Lender May Choose to Sell the Property: In some cases, if the lender is not convinced of your long-term ability to continue making payments, they could instead opt to sell your home and bypass the loan modification process entirely.
Contact a Loan Modification Attorney Today
If you are having financial issues and can not continue making your mortgage payments, the attorneys at Newland and Newland, LLP may be able to help. Contact us today to determine if loan modification may be an option for you. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.
(image courtesy of Larry Tseng)