As the number of foreclosures rapidly increased during the Great Depression, the federal government encouraged banks to agree to modify home loans. Some banks even offered trial loan modifications, which allowed homeowners a reduced payment for a limited period of time.
A trial loan modification seemed, for many homeowners, a temporary fix to stop home foreclosure. When banks agreed to a trial loan modification, they either reduced the interest rate or the base payment amount to allow the homeowner to pay less each month. Banks that offered a trial loan modification usually evaluated the homeowners' income in determining the reduced amount.
Many homeowners learned the hard way, however, that the trial loan modification didn't actually prevent home foreclosure. Even when the homeowner paid the trial modified loan amount on-time and in full, banks still initiated foreclosure proceedings.
One family in California learned that Chase Bank was foreclosing on their home, despite never missing a payment, based on reports to the Associated Press. Chase offered a trial loan modification, which the family agreed to because they wanted to save more money. After paying the modified mortgage amount for months, they learned that Chase decided the smaller payments weren't enough. Chase eventually sent a notice of foreclosure.
This sad story is repeated throughout the United States by dozens of homeowners who feel that banks tricked them into agreeing to a trial loan modification, only to foreclose on their loan anyway.
Lawsuits have been filed against banks, alleging that banks fraudulently collected trial loan modification payments in an effort to continue to earn money from a loan that they knew they were going to foreclose upon. Other lawsuits, such as suits filed in Boston, allege that banks failed to comply with the federal government's Home Affordable Modification Program and therefore breached their contracts.
New Regulations Alter Trial Loan Modifications
Banks argue that their actions were legal, according to the Associated Press. In fact, trial loan modifications weren't fully regulated by the federal government until June. The new regulations require that banks offer permanent loan modifications if homeowners pay the trial loan modification payments on time.
Now, under the new regulations, banks are more fully evaluating the homeowner's income and assets before agreeing to trial loan modifications. If approved, borrowers actually receive pre-approval for permanent loan modification prior to entering the trial loan modification period.
Anyone considering a trial loan modification should be leery. While it is a good option for some people, it is important to understand all of the options available before making a final decision. For some, bankruptcy may be a better choice to prevent home foreclosure.
