With many of the homeowners feeling the pinch of economic depression, loan modification has become one of the most sought-after options to avoid foreclosure. Recently there has been a forum discussion that focuses on an issue, where the lender charges off the second mortgage even after approving modification of the loan.
The poster received a verbal agreement from the second lender for a trial modification plan. He paid the first trial payment on time as per the agreement. But the next month when he pulled his credit report, he found the loan account has been charged off. On contacting the lender, the poster learned that the former had again reinstated the loan. The second lender then asked him to make the next trial payment by Oct. 27, 2009, else he would again charge off the debt.
Following are the questions the poster asked the community:
1. Does he have any ground against the second mortgage company that charged off the loan even after approving a trial loan modification?
2. If the lender charges off the debt after Oct. 27, 2009, can the poster still negotiate with the mortgage company for loan modification?
3. In case the second lender forecloses on the property, will the first cancel negotiations for the modification?
Trial modification plan & mortgage charge-off
It seems the second mortgage company erroneously reported the debt to the bureaus as charged off. It could also be possible that they charged off the debt as they thought they could not recover the balance on the loan. Though the poster paid his first trial payment in good faith, he has no ground against the second lender as there is no written agreement for the loan modification. The second lender is not legally bound to offer modification as the verbal agreement is not legally valid. So, the lender reserves the right to charge off the debt to whoever they want.
Negotiations for modification after charge-off
When the lenders think they will not be able to recover the outstanding amount of the mortgage, they often charge off the debt and report it as their loss to the IRS. Once they charge off the debt, they will no longer collect the payments; rather the lenders sell off or assign the debt to a collection agency. Thus, the poster will not be able to negotiate with the second mortgage holder regarding the loan modification. He will have to talk with the collection agency (CA). The CA can either modify his debt or do a settlement with him. Through settlement, the poster can convince them to accept a short payoff to clear the debt.
Chances of foreclosure by second lender
In case the second lender decides to foreclose on the property, there will be no need for a modification on the first mortgage and the first lender will definitely cancel negotiations for modifying the loan. However, if the property is underwater, it is unlikely that the second lender will foreclose. They hold a second lien on the property and whatever money they get from the foreclosure auction will first be used to satisfy the first mortgage. Whatever remains in excess from the sale proceeds will be used to pay off the second loan.
To know more on this issue, you can refer to the following page:
http://www.mortgagefit.com/second/loanmodification-chargeoff.html