With foreclosure rates sky rocketing and no end in sight, banks are much more willing to negotiate with homeowners on the specifics of their mortgages. These days, “loan modification” have almost become an industry by itself as banks allocate more and more resources to work on this.
Sparked by all the news surround it, a reader had this question:
What happens to IRAs and other retirement accounts when someone approaches a bank asking for a loan modification? Can the bank take over those retirement savings to satisfy part of the debt (in the case of a short sale for example)?
Loan Modifications
A loan modification is basically a change to the terms of your loan. In theory, it could be lower interest rates, shorter loan terms or even completely writing off the whole mortgage.
From what I’ve read (and heard), lenders will not agree to any loan modification unless you start to show inability to repay the monthly mortgage payments. Once delayed (or missing) payments become frequent though, they might work with you on a loan modification.
The modification process is basically a negotiation where the lender will reduce your monthly payment if it believes it is better off with you paying a reduced mortgage payment. Therefore, the modification needs to be better than your house being in foreclosure (in the bank’s eyes). In process, the retirement accounts are safe because they are still working with you to get you current with the mortgage payments.
What About Foreclosures
Think of foreclosure as a few months of non-payment. If loan modifications weren’t enough to reduce your payment to an affordable level (or if there were no loan mods to begin with), a notice of default may be sent to your house after 90 days of missed mortgage payments. At this point, the lender will seize your house and put it up on auction in an attempt to recoup the cost of lending you money.
If the proceeds doesn’t cover all the cost such as mortgage, administration fees, lenders may initiate a deficiency judgment (basically, they are suing you to get their money back). Most believe that lenders won’t even bother with this because this process is long, complicated and expensive. The argument is that if a homeowner weren’t able to repay the mortgage in the first place, he/she probably don’t have enough funds for the legal actions to be worthwhile.
If however the lender do decide to sue and win in court, you are obligated to repay any debt that the judge grants to the lender. At this point, it is like any other time you owe someone else money in which you try to repay it with all means possible (job, 401k withdraws etc).
If you don’t want to take money out your 401k and IRA, you can always file for bankruptcy where those types of accounts are safe from debtors.
The Shorter Answer to the Question
Basically, 401ks and IRAs are safe from all types of debtors even though other types of assets (savings, other investment properties and taxable investing accounts) could be in danger. However, in the case of fraud (as determined by the court), nothing is safe.
- E*Trade IRA - Official Site
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{ 25 comments… read them below or add one }
That pretty interesting to know; filing for bankruptcy should be the last resort though.
Excellent analysis! This is the first online article I’ve found on this topic so far.
As long as a home owner is making an effort to get caught up on payments and there’s no evidence of fraud, things should be OK.
Good to know that retirement savings are protected (as long as the homeowner is honest).
This is good information. Thanks for posting it here.
The craziest thing happened! I make my mortgage payments to GMAC. I am not behind on my payments nor have I ever reached out to them for help. I can easily make my mortgage payment.
So… Today I got a call from Impac. Apparently they “own” my mortgage while GMAC is simply my loan servicer. Impac offered to lower my interest rate and reduce my principal. They faxed the “hardship letter” and a “financial situation and expenses letter” over to me immediately.
Their rep says there is very little due-diligence performed on the docs I send them and it’s a very easy process.
Then he tells me my cost for having this done is $1995. He says they’ll forgo my first payment on the modified loan to cover this expense.
I own a home on a lake in Southern Calif. My current payment is $3800/month plus taxes, etc. The rep claims he can reduce my payment by $1000/month.
Sure sounds like a scam… But, I’ll check it out!
My main point is that I am NOT behind nor have I ever been late on my house payment. My mortgage holder REACHED OUT TO ME! And yet a close friend with Country Wide cannot seem to find out who or what department to talk to for help on her mortgage loan.
JerJer
I have personal experience with loan modifications.
Jer,
Did you go through with the IMPAC modification? I just got off the phone with a rep………..same details.
Thanks,
Jeff
Hi Jer!
I just read your comment on the Impac Modification Loan. We got the same call this week and it sure does sound good. They seem legetimate. Did you ever go through with the modification? Did you ever find out if it was a scam or legit. Thank you Lorraine
It seems legitimate. Was your loan originally held under IMPAC?
I have had the same offer from Impac (Countrywide services my loan) and also dubious. Sounds a bit too good to be true and, when I called Countrywide, they told me they would need to approve any modification. The Impac rep said that is not the case and that Impac owns my loan (true) and Countrywide cannot disapprove the modification. I am uncomfortable with paying this $1995 fee up front and then not having the modification come through. I was reassured that this cannot happen. Do you have any more info?
Pat
Personally, I haven’t dealt with this situation (yet) however in South Florida, there have been several reported scams already. The advise from Dave Ramsey and others I’ve seen on TV and print is: try to negotiate with your bank as much as possible to come up with a plan that will allow you to keep your home. Many ex- mortgage brokers and some attorneys are now making a living promising people that for $1,500-$3,000 they’ll negotiate with their bank. I’d be very cautious before handing out my money to them. You could use that money to use to pay for your mortgage or other debts. There’s a big back log of loan modification requests at most banks and response may be seem slow. Be persistent and hang in there. Good luck!
Pat: I’m against paying someone upfront to perform a service that you can do yourself for free. Like Liz said, call the bank up and negotiate a contract yourself. If you try to use someone else, I’m sure they will ask you to sign a contract that says in the fine print “results not guaranteed”.
If there was any guarantee, it wouldn’t be called negotiation. It would be called free money here. You could also ask whether they are willing to just take a percentage of what they end up saving you. Turning the offer around might save you some hassle.
Hi, I just got the same call from Impac (my loan is serviced through countrywide, now BofA). Did any of you go through with the modification?? I called Impac and they said it is a legitimate offer and I’m getting some BofA contact names of the people that the rep works with when putting these through. But let me know if any of you actually went through with it.
Hello. I just got the very same call yesterday. I pay my mortgage to GMAC and received the call from Impac. I’m really curious to know if anyone has gone through Impac. I’ll call them shortly to get the details of what they are offering.
I have been speaking with IMPAC, it sounds like a great program they have going on. Better to modify existing loans then have to own homes because we can’t afford the mortgage payments. Mine is going from 6.5 to 3.5, $1,300 less a month (interest only), which is what I have anyway. So I can pay some principal down as well. Let me know if anyone else is doing this. I hope I’m not being a fool.
Has anybody had success with the Impac program?
I have, went from 6.5 to 3.5 for the next 5 years.
Thanks Abbie. How long did your process take? 2 to 4 weeks is what I am being told. Was it as smooth as you expected? Do you have any advice about the process? Thx! ./rj
Its a little confusing at first but I spoke with someone at GMAC (which is where I got my loan) and they confirmed this loan modification program with IMPAC. Impac told me not to make July and August mortgage payments until the loan modif. has gone through, then I pay Sept. as scheduled. I could take up to 60 days for GMAC to get this new loan modif. in their system and bill be correctly. Makes me nervous but I’m going with it. My payment went from $2809 to $1530 (interest only, which is what its been for the get go) but we are planning on paying a bit more so we can start paying down the principal which has been a struggle for the past 3+ years. let me know what you decide to do, I’d be interested in hearing for someone that is doing this as well.
Have you received your loan mod docs? Did GMAC call and/or send you a late payment letter for July payment? Thx! ./rj
How has this turned out for you? I’m in the middle of the same thing, concerned that GMAC won’t be on the same page as IMPAC. Thanks!
You I recvd the loan mod. documents. I just Fed Exd it to GMAC today. No late payment letter, just the regular bill in the mail. The rep at Impac told me that he would be happy to have a conference call with GMAC in the event that I need to talk to customer service. Are you thinking of doing this? Where do you live? I live in Northern CA where my house has depreciated about $125K. They say it will turn around but I can’t imagine that happening anytime soon.
I received the same phone call offering to lower my rates. I just looked up impac and it seems to be legit. I checked yahoo finance quote IMPM and it lists the same numbers that I have been using to contact Impac. I called GMAC, my servicer, and they confirmed that Impac owns the note and is actively contacting people about refis. I am just a little leary because it sounds too good to be true. They are offering a very good deal, but they want up front fees. I understand why they are offering the deal since I might just walk away from my investment property since the fees are going up so much and I’m underwater.
Let me know how things turn out for everyone!
we received the same call from impac so we decided to call gmac to confirm this. gmac did confirm so we went ahead with the process. the impac rep emailed us the welcome letter, the form we had to fill out, and instructions on how to write the hardship letter. we checked out the bbb and saw that impac is legit.
funny, I got the same offer from Impac. But, they had just modified my loan at the end of last year, without my ever contacting them or ever being late on a payment. The prior modification amounted to fixing the interest rate at 4.99% for another 5 years. Only problem is, my fully indexed rate is about 4% now. So, I am losing short term but have more security for the medium term. I am also leary, but I will go ahead with it after confirming the relationship between the rep and IMPAC. I have been very happy with IMPAC. If my rate goes below 4% for 5 years, I will be ecstatic.
My experience is the same as all these. I signed up for the IMPAC program but called GMAC & the low-level rep didn’t know what I was talking about. My concern is that I won’t pay GMAC for 2 months & they won’t know why. Has anyone actually experienced the 2-month moratorium & actually experienced the payment modification so that GMAC expects the modified amount?
Hi Richard,
I had the same thing happen. Eventually it all catches up and after the 2 months of my not paying my mortgage bill (which scared the hell out of me but I went with what IMPAC told me to do), I got the corrected statement reflecting my 3.5% 5 year remodification and all is good. The GMAC didn’t know what I was talking about but I asked to speak with her supervisor and she talked to me about if and know what was happening. Good luck. Feel free to ask me any more questions.
Abbie