Should You Sue Your Lender?

July 22, 2011

The Home Affordable Modification Program (HAMP) was touted as a solution for millions of Americans struggling to pay their mortgages. Homeowners could seek modification of loans to reflect the current value of their properties. Unfortunately, only a fraction of mortgages have been modified through this program, when it was initially estimated that 3-4 million mortgages would be modified by the end of 2012.

Even worse, scores of homeowners still face foreclosure, even after going through the lengthy process of petitioning for a loan modification and participating in a trial modification period (which called for temporary lower mortgage payments). The bank would later determine they were not eligible for a permanent modification and reinstate the original mortgage payment. When the homeowner could not pay it, the bank would foreclose on the property.

Homeowners in this situation may contemplate a lawsuit to protect their rights.

Unfortunately this practice has largely been unsuccessful. First, many have claimed that lenders are breaching contracts with homeowners by not granting permanent modifications after successful trial periods. Class action lawsuits advancing this claim have not yet yielded positive results. Lenders maintain that such agreements do not guarantee that a permanent modification will be granted.

This certainly does not mean that an individual lawsuit, or at least the threat of one, won't help you. Specific allegations of bad-faith by the lender can be persuasive, but you must be diligent in communicating with your mortgage servicer to ensure that it follows all modification protocols. Be certain to document when you have sent materials, when you have spoken to representatives, and what they have promised to do.

If you have a second mortgage on your home, you may also consider consolidating the two loans into one. Depending on the value of your home (and how much it may be underwater) it may suit the lender's best interests to combine the mortgages. It represents a better investment for them, and could save you money.

If you are in dire financial straits, bankruptcy may be an option as well. In Chapter 13 bankruptcy, homeowners may ask the court to discharge all unsecured debt, including home equity loans and second mortgages that fall into this category because the value of the home no longer secures the debt. This process is called "lien stripping" and it may help in negotiating with your lender. Moreover, bankruptcy stops all collection actions against you, including foreclosure proceedings.

For more information on how to deal with lenders, contact an experienced attorney.

Article provided by Illini Legal Services
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