Mortgage & Real Estate Brokers: Upfront Fees on Loan Modifications NOW ILLEGAL in Los Angeles

The Los Angeles City Council has made it illegal for mortgage and real estate brokers to charge an upfront fee when offering to help distressed homeowners obtain loan modifications. This effectively puts the loan modification business for real estate and mortgage brokers out of business. Gone. Bye-bye…

In case anyone thinks that’s not the case, let me explain.

Once a mortgage is modified, what would a loan modification company do if the customer didn’t pay the bill? Threaten to ruin the homeowner’s credit? You must be kidding. These are people that almost lost their homes. Their credit, you might consider, already leaves much to be desired. Take them to Small Claims Court? Sure, why not. As long as you understand that the best-case scenario is that you’re going to get like $20 a month, Small Claims Court might work out fine. Of course, when the homeowner doesn’t make the $20 payment, you’ll be going back to court or chasing a homeowner around for $20… well, plus late fees, so let’s say $24.

And please don’t tell me that people will pay their bill because they’re just that appreciative of the work that was done. Because I have a friend who runs a hospital, and 50% of his bills go unpaid all the time. Why do you think hospitals are so interested in what kind of insurance you have? Because they know that 50% of the patients won’t pay their bills, that’s why.

Helping someone with a loan modification without an upfront charge is something a nonprofit organization might do, but it’s not a business plan for a for profit entity… unless of course you follow the hospital pricing model and start charging $7,000 for a loan modification. Then when half don’t pay, you’ll be okay.

Yep, now that’s what I call a law that’s helping troubled homeowners. Thanks Mayor Villaraigosa! Good thinking there. You’re a smart one, I’ll give you that. Did you have anything to do with the Hope-4-Homeowners program, by any chance? Just wondering…

Here’s what I found to be the most amazing aspect of the story in the LA Times. It said: “Some of the services are legitimate, officials said, but others are not.” SOME are legitimate? OTHERS are not?

Let’s see… how many are there in a “some”. Hmmm… I can do this… wait… okay… minus 7, plus the sum, divide by 2… carry the 3… hmmm… SOME? How many is some? Is some “most”? Is some “many”? How can you put an entire industry out of business, an industry that is more needed at this moment than perhaps any time in history, on the basis of “some”?

And “OTHERS” are not? OTHERS? What’s the deal? Did we put people on the LA City Council that can’t do math? Do we have remedial learners on the LA City Council? No wonder Los Angeles is in such great shape. How many new roads do you think we need? “Some.” Oh, goodie.

Why is it that not one story in the entire country that claims that there are loan modification scams around every corner can come up with a number. I mean a number over say 22… or 71… or even 250, which is the number of investigations the California Department of Real Estate says it’s investigating as related to loan modification firms. The Illinois Attorney General was recently quoted as saying that she filed charges against two loan modification scams, but that’s not such a big deal. There are more than two Illinois governors in prison in Illinois, last I heard.

And why does nobody seem to notice, much less care, about the amazing lack of specificity on this issue? On April 6th, you might remember, Secretary Geithner and Attorney General Holder went on television to tell the country about all the scammers out there. And all they could come up with was five cases filed to halt loan modification scams and 71 companies they sent letters to because of “suspicious advertising”.

Oh yeah, and there was that little white lie they told about the 2100 cases of mortgage fraud the FBI is pursuing. In case you didn’t read my last column, I looked it up on the FBI’s Website and the only problem with the number was that it referred to mortgage fraud, which has very little to do with loan modifications. But other than that, you’ve still got the 5 and the 71 letters… not bad. Better than “some” and “others,” I suppose.

Mayor Antonio Villaraigosa, in an effort to prove beyond any doubt that he is both out-of-touch, and misinformed, referred to the new law as “a tool to help residents keep a roof over their heads.”

After carefully researching this issue for several months now, there is only one thing I know for sure: Reducing the avenues available for distressed homeowners to turn to for help with modifying their mortgages will NOT keep a roof over anyone’s head. Period.

Just so we’re clear, The LA Times story reported the following: “State law already prohibits mortgage consultants from demanding upfront fees from homeowners who are in default, the first stage of foreclosure. The new Los Angeles law, which the council approved unanimously, will apply those protections to all homeowners.”

Approved “unanimously”? Well, I’ve got to hand it to the banking lobby. Nicely done. You guys should work for the Swine Flu… you really know how to panic a population out without details. Keep it up and soon there will be no more private sector loan modification firms. I know you’ll be happy about that. Then, the millions of distressed homeowners will have nowhere to turn to for help that’s on THEIR side. They won’t qualify for Obama’s insipid little program, so they’ll have no alternative but to try their luck with the banks on their own. Scared. Unknowledgeable. Easy as pie to intimidate in almost every case. I’m sure that will work out real nice for you.

I wish I knew where banking lobbyists hung out after work. If any readers know, please send me a message. I’ve pretty much had it with them and I’m not above throwing a few of them around in a parking lot after a few beers. If anyone would like to join me, you know how to reach me. Come on… it’ll be like old times.

Hey banking geeks… I wouldn’t be too proud of your victory here, though. You only beat the private sector loan modification firms and that’s hardly an opponent. I’m trying to organize them in order to fight back and I can barely get a return call. Well, alrighty then… so this round goes to you. Big deal. So, you beat a bunch of starry-eyed optimists that thought it mattered whether they were doing a good job. Well, this will probably teach them a thing or two. And it does cost money to go to school.

The LA Times also said: “As the housing crisis has worsened, signs advertising such services have sprouted across Southern California.” Ohhhh… bad signs! Did they also outlaw bad signs? After this, I think I’ll go out with my baseball bat and kick a sign’s butt. Maybe that’ll make me feel better, but somehow I doubt it.

Lastly, the City Council also enacted a provision in the new law requiring a written contract between a mortgage consultant and a homeowner that allows the homeowner to cancel within seven days… which only proves that the Los Angeles City Council has NO CLUE what they’re doing, because that provision couldn’t possibly be met with any objection because there won’t be any firms left to object.

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