Source: The Finance Corner 
Have you ever heard, “If it’s too good to be true, it probably is? In the case of borrowers who have been timely on their mortgage payments and are trying to modify their loans through a loan modification company, “It probably is”.
This is an unregulated market, as loan modifications offered on a wide basis have only come into existence in the past several months. Loan modification companies have sprung up mainly comprised of displaced real estate professionals who found themselves out of work as the market declined. I have also come across several law-firms offering these services. In Minnesota, there is no specific licensing required for Loan Modifications to date, but we are seeing some action being taken at the federal level. Even so, these companies continue to operate, with the legitimate organizations in the minority.
As a mortgage industry professional, I have personally spoken to dozens of clients who have shelled out between 500-5000 dollars to procure the services of such companies. To date, I have spoken only to one such person that has had a favorable review. (They paid 600 dollars up-front and their loan was modified to 3.5% for the next 3 years). The others have either gotten nowhere, have been in process for several months, or have been informed that their non-refundable service fees were spent in vain.
A couple that I’ve spoken with has been unable to ‘locate’ the mod company they were working with after paying them $350.00. However, by far the worst advice I’ve heard from clients second hand is to, “Miss two payments, and then we’ll talk.” This will destroy your credit, make future financing on major purchases all but impossible to obtain for several years, and should be avoided at all costs.
Pie-in-the-sky promises aside, these companies are offering a service that the loan-holders personally have access to, nothing more. Loan holders can call their lender and request such modifications on their own, so they are akin to a lawn mowing service in that they offer little more than convenience to their clients.
Because they’re not paid by the lender to arrange such modifications, and because the benefit is squarely on the borrower, it is the borrower who is paying for their services. Because their typical client is a homeowner who is struggling with either credit or employment issues that prevent them from a traditional refinance, the company is certainly viewing the majority of their clientele as a significant credit risk. This, along with the fact that there are no closing costs in which to incorporate their charges, is the main reasons that up-front payment is how the majority of these companies operate.
While some of these companies may have a genuine interest in helping people, I personally believe that large shares of these companies are uncertain of their ability to ‘deliver the goods’. Lenders are reluctant to participate in modification programs because it reduces their profit-margin. If a mortgage holder with an average of interest rate of 6.25%, and an average loan amount of 200,000, modifies down even 1% to 5.25%, the loss, (even after the lender is paid the $1,000/ per year government incentive), is close to $400.00 dollars each year to the lender.
If the 5,000,000 people that President Obama mentioned that were going to be eligible for the new loan modifications were to modify their loans, (With an average of 6.25% and an average loan amount of 200,000) down even 1% to 5.25%, the losses would total well over $2,000,000,000.00 billion dollars each year industry wide.
I’ve spoken with some who make the argument that lender practices are largely to blame for the current state of the economy, (Personally, I believe the derivatives market is the true culprit, for the sake of time we’ll steer clear of this discussion,) and that they hold an ethical obligation to be a part of the solution. Be that as it may, you’ll be hard pressed to find a business in any industry that voluntarily will take a loss…
When I do come across clients in real need of a loan modification, instead of referring clients them to a loan mod company, I have advised them to be prepared for aggravation and call their lender themselves. To date, I have spoken with 2 of these clients who were able to modify their mortgages on their own, and have done so for free. Not impressive stats, but they’re still outnumbering the mod companies that I’ve seen have success.