Mortgage servicers handle loan modification applications from homeowners. Unfortunately, servicers sometimes make serious errors when processing modification requests. This can cause a number of problems for a homeowner, like missing out on getting the loan modified or even a wrongful foreclosure.
Read on to learn about the most common servicer violations when it comes to loan modifications and find out what to do if any of these things has happened to you.
Below are some common problems that servicers perpetrate in the loan modification process. (Learn about how mortgage servicing works.)
Many homeowners have experienced lengthy delays when waiting for the servicer to make a decision on whether or not to grant a loan modification. In some cases, the servicer doesn't tell the homeowners that they are missing documents necessary for the loan modification decision. In others, the servicer simply doesn't get around to reviewing the request in a timely manner.
Federal mortgage servicing laws, effective January 10, 2014, aim to reduce these delays. Under these laws, when a servicer receives a loan modification application from a homeowner 45 days or more before a foreclosure sale, it must:
If the servicer receives a complete application more than 37 days before a foreclosure sale, it must review the application and determine if the borrower qualifies for a loan modification within 30 days. However, the servicer generally doesn't have to review multiple applications. But if you bring the loan current after submitting an application, you may submit another.(Learn more about federal laws that protect homeowners who're facing a foreclosure.)
During the foreclosure crisis, it was commonplace for servicers to tell homeowners that they couldn't get a modification unless they were late in payments. Sometimes—but not very often—servicers still make this statement. But this is almost always incorrect. For most modification programs, you may be either behind in payments or simply in danger of falling behind (called being in danger of "imminent default") on your mortgage payments.
In some cases, servicers ask homeowners to submit and then resubmit information when applying for a loan modification. This is especially true in the case of income verification documents—like pay stubs and bank statements—which can quickly become outdated in the eyes of the servicer.
In addition, servicers might also sometimes ask borrowers to resubmit documentation when the paperwork gets lost. If this happens to you, you should resubmit any duplicate information that the servicer requests, but be sure to keep a record of when you sent it, who you sent it to, and send it by some method that you can track.
Sometimes, a servicer makes an error in a calculation when evaluating a borrower for a loan modification, which leads to an improper denial.
NPV calculations. When a servicer evaluates a borrower for a loan modification, it looks at financial information about the borrower, the loan, and the property (such as the borrower’s income, the unpaid principal balance on the loan, the property’s fair market value, etc.). It then sometimes makes a comparison between:
If the investor would be better off if the servicer forecloses on the loan, rather than modifies the loan (this is called NPV—or net present value—negative), then the servicer doesn't have to modify the loan. Sometimes servicers make a mistake when calculating the NPV.
Under federal law, if a trial or permanent loan modification is denied because of a NPV calculation, the servicer must include the inputs used in the net present value calculation in the denial notice.
Other calculations. Other kinds of miscalculations can lead to a modification error. For example, in 2018, Wells Fargo admitted that due to a computer glitch, it failed to give modifications to almost 900 mortgage-loan borrowers—even though they qualified for relief. The bank eventually carried out foreclosures on around 500 of those homeowners.
Many loan modifications start with a three-month trial period plan. So long as you make three on-time payments during this period, the modification is supposed to become permanent—assuming you still meet the eligibility criteria.
When a servicer promises to modify an eligible loan, homeowners who live up to their end of the bargain expect the servicer to keep that promise. But sometimes homeowners who have successfully made their trial payments are unable to get the servicer to make the modification permanent.
Servicing transfers are common in the mortgage industry. In some cases, the new servicer fails to review an already submitted loss mitigation application (that is, an application for a loan modification or other foreclosure avoidance option) or fails to honor the modification agreement with the previous servicer.
Under federal law, if a complete loss mitigation application is pending at the time of the transfer, but has not been evaluated, the new servicer has to review the application within 30 days of the transfer date.
Also, a servicing transfer shouldn't affect a borrower's ability to accept or reject a loss mitigation option offered by the prior servicer. If a new servicer comes into the picture and the time frame for accepting or rejecting a loss mitigation option offered by the old servicer has not expired as of the transfer date, the new servicer must allow the borrower to accept or reject the offer during the unexpired balance of the applicable time period.
Servicers that commit any of the violations mentioned in this article could cause you to (among other things):
If your servicer has committed any of the violations mentioned in this article or is otherwise improperly handling your loan modification, you should speak to a qualified attorney who can advise you what to do in your particular situation.