1. “Pay us $1,000, and we’ll save your home”  Some legitimate housing counselors may charge small fees, but fees that amount to thousands of dollars are likely a sign of potential fraud — especially if they are charged up-front, before the “counselor” has done any work for you.  Be wary of companies that require you to provide a cashier’s check or wire transfer before they take any action on your behalf.

2. “I guarantee I will save your home — trust me.”  Beware of guarantees that a person or company can stop foreclosure and allow you to remain in your house.  Unrealistic promises are a sign that the person making them will not consider your particular circumstances and is unlikely to provide services that will actually help you.

3. “Sign over your home, and we’ll let you stay in it.”  Be very suspicious if someone offers to pay your mortgage and rent your home back to you in exchange for transferring title to your home.  Signing over the deed to another person gives that person the power to evict you, raise your rent, or sell the house.  Although you will no longer own your home, you still will be legally responsible for paying the mortgage on it.

4. “Stop paying your mortgage.”  Do not trust anyone who tells you to stop making payments to your lender and servicer, even if that person says it will be done for you.

5. “If your lender calls, don’t talk to them.”  Your lender should be your first point of contact for negotiating a repayment plan, modification, or short sale.  It is vital to your interests to stay in close communication with your lender and servicer, so they understand your circumstances.

6. “Your lender never had the legal authority to make a loan.”  Do not listen to anyone who claims that “secret laws” or “secret information” will be used to eliminate your debt and have your mortgage contract declared invalid.  These scammers use sham legal arguments to claim that you are not obligated to pay your mortgage.  These arguments don’t work.

7. “Just sign this now; we’ll fill in the blanks later.”  Take the time to read and understand anything you sign.  Never let anyone else fill out paperwork for you.  Don’t let anyone pressure you into signing anything that you don’t agree with or understand.

8. “Call 1-800-Fed-Loan.”  This may be a scam.  Some companies trick borrowers into believing that they are affiliated with or are approved by the government or tell you that you must pay them high fees to qualify for government loan modification programs.  Keep in mind that you do not have to pay to participate in legitimate government programs.  All you need to do is contact your lender to find out if you qualify.

9. “File for bankruptcy and keep your home.”  Filing bankruptcy only temporarily stops foreclosure.  If your mortgage payments are not made, the bankruptcy court will eventually allow your lender to foreclose on your home.  Be aware that some scammers will file bankruptcy in your name, without your knowledge, to temporarily stop foreclosure and make it seem as though they have negotiated a new payment agreement with your lender.

10. “Why haven’t you replied to our offer?  Do you want to live on the streets?”  High-pressure tactics signal trouble.  If someone continually contacts you and pressures you to work with them to stop foreclosure, do not work with that person.  Legitimate housing counselors do not conduct business that way. (Comptroller of the Currency, Administrator of Nationl Banks, US Department of the Treasury)

The major types of modification are discussed below in order of their cost to the investor and their value to the borrower.

Capitalization of arrears: The past-due payments and perhaps late fees and other charges arising out of past delinquencies are added to the loan balance.  A new payment is then calculated, which will be a little higher than the previous payment.  This is the most common type of modification because it has very little cost to the investor.  Its only value to the borrower is that it provides a new start by making him current.  It works for a borrower who has hit a temporary rough patch and is now back on track, but not for a borrower who needs a lower payment.

Extension of the term: A term extension is the payment-reduction modification that is least costly to the investor.  However, if a loan was originally 30 or 40 years and it is now only a few years old, the payment can’t be reduced very much this way.  If the loan was originally for 10 or 15 years, a term extension to 30 years will reduce the payment materially, but 10- and 15-year loans comprise a very small share of loans in distress.

Reduction in interest rate: This is a more effective way to get the payment down.  Cutting the interest rate on a 30-year loan from 6 percent to 3 percent will reduce the payment by about 30 percent, whereas extending the term to 40 years reduces it by only 8 percent.  Rate reductions are flexible, since they can be adjusted to the needs of each individual borrower.  They are more costly to the investor than a term extension, and correspondingly more valuable to the borrower.  To minimize the cost, rate reductions in some cases are made temporary.  The modification may call for the original rate to be phased back over five years, for example.  This presumes that the borrower’s payment capacity will grow over the same period.

Freeze the interest rate: On adjustable-rate mortgages (ARMs) that are close to a rate reset date, where the new rate and payment will be well above the one the borrower is now paying, a modification can freeze the rate and payment at the current level.  Many subprime loans have been modified in this way because they carried margins of 5-7 percent, which when added to the current value of the rate index, would have resulted in substantial increases in rates and payments.

Reduction in loan balance: The mortgage payment declines in tandem with the balance.  A 20 percent drop in the balance, for example, results in a 20 percent drop in the payment.  Unlike a cut in the interest rate, however, a cut in the balance can’t be temporary, which makes it the most costly modification for investors and the best modification for borrowers.  Balance reductions do have one major advantage for investors: They reduce the borrower’s negative equity, which increases the borrower’s incentive to do everything possible to keep the house.  It is very plausible that re-default rates on loans that are modified with a balance reduction are materially lower than on other types of modifications.

In general, borrowers must take the modification they are offered, as they have very little bargaining power. (inmanNEWS)

In general, borrowers should seek a refinance rather than a modification if they can refinance at a significantly lower rate at a reasonable cost.  However, you can’t refinance advantageously if you are behind in your existing payments, have little or no equity in your property, or don’t qualify for a refinance for other reasons such as a low FICO score or inability to document adequate income.

Mortgage modifications are changes in the terms of a mortgage loan designed to make it more affordable to the borrower.  Generally, modifications are available only to borrowers in default or in imminent danger of default.  The purpose is to cure or avoid the default, thereby avoiding foreclosure.  In general, borrowers must take the modification they are offered, as they have very little bargaining power.  Their only card — the implicit threat that if they don’t receive an adequate modification, they will default — is one they can’t play, at least not explicity.  However, borrowers can indicate what they can afford to pay, without it being perceived as a threat. (inmanNEWS)