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 reasonable.

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 modification?

A.        Only 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?

A.         No. 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 payments?

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 consultations?

A.         Absolutely

Q.        What is reasonable to expect from my lender in terms of a loan modification?

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?

A.         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:

Standard Costs

• 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)
  
  
• Insurance
  
  
• 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
  
  

Possible Costs

• 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 stations 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 terms.
  
  
• 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.

Other Factors

• Employees 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 loan?

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 payment?

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.

Q.        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.

Q.        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 economic realities.

Q.        My loan is being serviced by a company other than the mortgage lender. How does this effect a potential loan modification?

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.

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.