Negotiating a Home Loan Modification: Beware of the Dual Track Rule – The Bank Can Still Foreclose Even If You’re Modifying Your Note

Posted By on August 11, 2011

In a loan modification, the original note’s terms are revised (monthly payment amount, interest rate, etc.) and the revisions become effective once everyone signs the modification agreement.  For a home loan in South Florida, that means the home owners whose names are on the original mortgage and note and a duly authorized representative of the lender must sign a formal agreement that includes the modified terms to their original bargain.

Negotiations for a loan modification are time-consuming.  Without a foreclosure defense lawyer, they can be extremely chaotic; with representation, they are still challenging and stressful.  Banks are not known for being easy-going, pliant negotiators.

Loan Negotiations To Modify a Mortgage Don’t Stop the Foreclosure Clock from Running

However, as a recent Sun Sentinel article points out, many homeowners in South Florida (and probably across the country) may think that if the loan modification is in process, and they are negotiating with their lender, they are safe.  Over home plate.  They’ve dodged the bullet of foreclosure.

This is not true, and it is a very good thing that reporter Donna Gehrke-White of the Sun Sentinel is bringing this to everyone’s attention.  In fact, as the article entitled “Under new rules, loan modification won’t protect you from foreclosure ” points out, there are new rules regulating the federal housing giant Fannie Mae, and part of those new regulations allows banks to keep on with their foreclosure proceedings if the loan has gone 120+ days without a payment.

The Fannie Mae rule looks only at the calendar and whether a payment has been made.  Fannie Mae doesn’t ask if the bank has been busy negotiating a new deal.  If the negotiations take longer than the 120 day window, then the bank can legally move forward to foreclose no matter how intense the loan modification efforts have been and in blatant disregard of how much in good faith the home owners have been trying to modify their loan and save their home.

It’s called the “Dual Track” and It’s Legal

Unless a Florida homeowner has a finalized, legally modified loan in place, the bank can still foreclosure with Fannie Mae’s blessings even if the homeowner is making their payments under a trial modification as long as the homeowner is still 4 months behind in their mortgage payments. The homeowner is on two tracks: in a courthouse, as a foreclosure defendant, and in a conference room, hammering out a new loan.  Being in one place doesn’t stop the other track from running: hence, dual tracks.  Banks like the dual tracks, it’s the best place for them to be.

This isn’t new – Dual Tracking Has Been Challenged For Awhile Now

As ProPublica reported back in December 2010, the federal government’s approval of dual tracking has been challenged both by industry experts, foreclosure defense attorneys around the nation, and Congress.  Many believe that this behavior is unfair. In response, Fannie Mae provided an explanation of why fairness isn’t a barrier is given here (pdf), in testimony by Fannie Mae’s Executive Vice President of Credit Portfolio Management to the Senate Finance Committee where he says in part:

We set a timeline for the servicers for an important reason – the modification or workout process needs to be completed in a timely way. The longer the process takes, and the further in arrears the borrower becomes, the less likely it is that the borrower will succeed with a modification – and the greater potential there is for loss to Fannie Mae and the U.S. taxpayer.

We know from our research that loans worked out earlier, rather than later, in the process are much more likely to succeed. On the other hand, each payment the borrower misses increases the likelihood of foreclosure.

If You Are Negotiating A Home Loan Modification In Florida, Know The Law That Applies

There are some homeowners that will attempt to negotiate a new deal with their bank by themselves.  Maybe they don’t want to deal with a lawyer in what is already a huge headache; maybe they don’t want to spend money on legal expenses.  It’s understandable to want to handle things on one’s own: being independent and resourceful is a good thing, an American tradition.

However, these days, it’s a risky undertaking.  As the Sun Sentinel points out in its warning, there are rules, regulations, and laws out there that are not favorable to the home owner — and the bank isn’t going to spill the beans about them so the home owner can protect himself.  South Florida foreclosure defense lawyers are available to help — I recommend that you call one, most offer a free initial consultation.

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