Note: To follow is an excerpt of a radio show interview conducted by Peter L. Mosca, host of Income Property Investment Talk dot com, with Bob Diamond, a practicing real estate attorney, real estate developer, and published author of three books on foreclosure investing. Bob eliminates the guess work in hiring a loan modification provider, reduces the frustration and confusion with the process, and details what is necessary for success in working with lenders. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/111809.

Mosca: What is a loan modification?

Diamond: Loan modification is changing the terms of loans to make it more affordable, on a monthly basis, and also to get it out of default if your loan is in default. One thing that surprises everybody is that you can actually modify a loan that’s not yet in default, if you’re able to show that you’re in trouble financially and that your credit card balances are increasing and your cash available is decreasing month after month. The things that you change in loans to make it more affordable are, of course, the terms that actually affect the payment. The payment of loans are affected by just a couple of things: the principle balance, the interest rate, the repayment term, and whether it’s an interest-only or a fully advertising loan. Those four factors are really the only things that affect what your monthly payment is. The bank may do a principle reduction and there are a couple of keys that we can talk about there as to when that will happen. They can reduce the interest rate, which is very common. Interest rates sometimes go down as low as 1%. They can also stretch out the term. It’s very common to change a 30-year mortgage into a 40 or even 50-year mortgage. If you do those things, either singly or in combination, you can lower the payment significantly, and if you’re far behind in your payment, like say someone gets seven or eight months behind, which is very hard for someone to catch up on all at once. If someone is in the position then the lender can tax the payments on the end, or they can fold the payments back into the mortgage and you pay a little bit each month towards them.

Mosca: You spoke about reducing the rate; you talked about stretching the term. What was the first thing you said?

Diamond: It’s everybody’s favorite, the Holy Grail: reducing principle.

Mosca: What types of hardships qualify for this type of help?

Diamond: A hardship letter is an explanation as for why you’re in trouble… why you’re unable to make your mortgage payment. The key to a hardship letter is that it explains in a simple, straightforward way, what the financial problem is. It can be absolutely 100% true, but you need to stick to the financial facts. You want to keep the explanation short because everyone has a short attention span these days, and if your hardship letter stretches to over two pages, they’re probably not going to read it. I spoke to one loss mitigation officer at a major lender and they told me they had 1500 files. One person was responsible for 1500 loan modification request files. So, if you imagine someone sitting there with way more files than they could possibly handle, you want to make their life easy. The hardship letter should be short. It should do exactly what you said, but it should have something personal in there. For example, “I really want to keep my house. I want to provide a home for my family, so even though I may be upside-down, I’m still going to pay for it as long as you guys can work with me to make an affordable payment.”

Mosca: Does make sense to the lending institution to work something out with these folks? I mean, in the long run, it’s better for them?

Diamond: Definitely. The statistics from the Federal Reserve when they did a study of it and the Mortgage Banker Association did another similar study, the statistics suggested that they recover between 65 and 67% of the original loan balance when they foreclose, on average. Given that most borrowers, if they’re given a chance to have an affordable payment, and not necessarily a principle reduction, but just a payment they can afford, most people will stay in their houses. There are some economists that will say differently, but that’s because they don’t know what they’re talking about. People stay in a home because it is their home. As long as they can afford the payment, they’ll usually stay. All that people are looking for is an affordable payment, and for the bank it usually makes sense.

Mosca: Everyone can come out to be the winner?

Diamond: Nobody is getting everything they want. It’s all sort of good negotiations. Everybody is happy to leave something on the table for the other guy in order to make it go through. The bank gives you a break on the interest rate, maybe cuts the principle sum, but gets you paying, maybe more than they would get if they had to foreclose. The homeowner gets an affordable payment, maybe a little uncomfortable, but it’s still affordable, and everybody wins. So I agree with your assessment, 100%.

Mosca: There was an article in Realty Times at realtytimes.com recently that talked about how the California attorney-general, the Department of Real Estate, the FBI, the California Bar, and even the California legislature are looking into more than 2100 companies suspected of defrauding troubled homeowners. According to the California State Bar’s Chief Trial Council, Russell Winer was quoted in this article, he says “‘In my 21 years in attorney discipline, I have not seen a crisis of this magnitude. It is truly unprecedented.’” What is happening out there?

Diamond: It’s interesting. The government has a view that companies went into business, took people’s money, and then didn’t do the loan modifications. I can tell you, they’re 180 degrees off. What actually happened is something completely different. People were charging typically $1,500 if you are not an attorney to do the work. The problem is that the banks make it so difficult to get a loan modification as far as time consumption that they made it, as a business, impossible to do for that amount of money. So what typically happened was that the providers would go out and advertise in markets, very quickly get a couple hundred cases queued up, and then find out that they weren’t able to get the cases through. Then they would make the mistake of marketing more, bringing more money in, so they could handle the cases that they had, hoping they would get more efficient, and in the end they run out of money, they can’t pay their staff, and then they’re sitting with hundreds of cases they can’t do. If the Attorney General and the legislature ever wanted to look at responsible party, they should look on the other end of the phone, which is the bank. The banks will do things like lose your faxes three, four, and five times. You’ll fax them a fifty-page fax with all the documents they request for loan modification, and then they’ll say, “Oh, we lost it. Sorry, could you resend it?” The problem is that they get evaluated on how quickly they turn around these loan modification requests, they get evaluated by the Treasury, and the banking regulators, and every time you send in the fax again, it restarts the clock. What they do is they play the “We lost the fax” scene. “Yeah, we’re sorry, but we lost your fifty-page fax again and we don’t have anything that we are processing for you. They’re playing games with people.

Mosca: What should people do to win the game?

Diamond: Here’s the secret: First, understand what’s going to happen, that you’re going to be faxing in three or four times. That’s number one; just understand that it’s not personal to you, but it’s going to happen. The second is to understand that if you’re diligent and keep after them, then you will get your loan modification evaluated and most likely you’ll get it through. But understand it’s not something where you can be passive. You’ve got to be calling them at least once a week to follow up, and each time that you send papers in, you need to call them the next day and make sure they received them and they have them logged in their system. Here’s a brand-new thing that we just found out: Bank of America is no longer accepting fax submissions, but they don’t tell you that. Their fax machine still works, you can still send faxes in, but they’ll never show up on their system. They’re only accepting email submissions now, This is the kind of nonsense we deal with. So what the legislature in California did was blame these loan modifications, what they call scammers, and they made a law that to me was smashing flies with hammers. They made a law that you can’t pay any loan modification companies up front until they’ve completed all the work they’ve promised to do, and that includes attorneys that do loan modifications. The problem with that is that you’re not going to find anybody to do the work.

Mosca: Sometimes when government tries to help, and they don’t reach out to the pros that know the ‘ins and outs’ like you do, they come up with legislation that’s counter to what they’re even trying to accomplish. We have a caller on the line. Her name is Christy from California.

Christy caller: I have two questions. One, we have two residential apartment buildings out-of-state, and we’re cash flowing at this point, meaning we’re covering the mortgage but we’re not profitable. We’re not in a necessarily desperate situation, but we are at a point where if there’s any more capital that has to go in to fix roofs or HVAC systems, we’re in a very difficult position and won’t be able to do that. Given that kind of a situation, where you’re actually able to make the mortgage payments so far based on the income coming in on the property, but you’re not able to put any additional money in how would we best position to get a loan modification? The second, I found out that we’re dealing with a trust; not dealing directly with a bank. The trust holds the mortgages. So, does that make it more difficult or easier for us to try to negotiate anything?

Diamond: I would say overall at the end of the year, your building is probably negative cash flow because of vacancies, bad debt, repairs and maintenance, right? You can probably make the mortgage payment with the amount you’re receiving each month, but that’s about it. I would have a discussion with the trust and let them know that the building’s not working. What you would need to do to support that is either yourself or if you have an accountant you work with, have them prepare a cash flow statement on a year-to-date basis. I wouldn’t be surprised if last year your tax return also shows that that building didn’t actually cash flow. I think that would help you go to them saying, “Look, I’m willing to keep this building, I would like to be able to pay for it, but we need an adjustment on the interest rate or some term of loan just to at least make it break even.” I think that if you approach it that way, that you’ll get a reception. Whether they will do anything or not is up to them, but I wouldn’t hesitate to approach them because your worst-case scenario is that they say, “No, we’re not going to do anything right now.”

Mosca: Christy, let me also jump the gun here because Bob did put together a Web site called antibankattorney.com and if you go to that site, it’s a step-by-step process. It might be able to help you out.

Christy: Thank you very much.

Mosca: Does the loan mod package determine whether or not a provider will want to work with you? Does it determine hardship?

Diamond: The bank is trying to reunderwrite your loan and figure out what kind of payment you can afford and then evaluating whether they’re better off taking a few lower payments or foreclosing. The package contains two years worth of a tax returns, three months worth of bank statements, and proof of income for 1-2 months depending on the bank. You’re proving your income, you’re giving them a monthly budget, letting them know how much money can contribute to the mortgage each month, and essentially the banks just have to create a new loan underwriting. What’s interesting to me about that is that banks are very, very efficient at processing loan applications. This is basically a new loan application yet they seem terribly inefficient about doing these.

Mosca: Is antibankattorney.com something that helps people do loan mods on their own?

Diamond: I started writing a book on how to do loan modifications back in April, and it was finished by August. What I intended with that book originally was for people who couldn’t afford to pay a loan modification company to have professional guidance. There are a lot of people who live in lower-cost areas where their house is $60-70,000, which isn’t a lot of money in general, but if you can’t afford your mortgage payment, it may as well be the king’s fortune. What we developed was a do-it-yourself loan mod book and then accompanying support. The book goes through in great detail exactly how to prepare the package, exactly how the home affordable program works, and how the non-home affordable program works, how FHA works, how hard money lenders work, and more. I give samples of packages that are put together, samples of hardship letters, and to enhance the effectiveness of it for people and to make it not just another do-it-yourself thing that you could never implement, we have a series of three live training calls that take place. What happens is in the three calls I guide you through how to put your loan modification package together. First call is about what paperwork you need to get together, and where do you get that, and what are the tricks and tips about that. The second call is you’ve got your paperwork together, here’s how to submit it to the bank, here’s how to have your first conversations with the bank, and the third call is you’re talking to the bank, now what’s a good offer versus what’s not a good offer. So we have about a half an hour worth of content that I present each call, and then I answer questions until we’re done, which is typically an hour later we’re done with the questions. So it’s a nice hybrid: it’s a book, but it’s not just that; it’s also the professional guidance. The reason that it’s so effective for people is that they’re not on their own, but they can do the grunt work. I mean if they can put the faxes through, and if they can pick up the phone and call the bank and say, “Hey, do you have my fax and do you need anything else”, if they can do that work, then it’s great because I give them the professional guidance they need and they do the legwork, and they save a lot of money but still have the professional guidance that they really need.

Mosca: Are you talking about your book, “Save Your House: the Insider Guide to Getting Your Loan Modified”?

Diamond: Yes.

Mosca: What is your golden nugget for today?

Diamond: If you want to go the website to find out if your loan is owned by Fannie Mae or Freddie Mac, who both do the loan modification, home affordable plan I talked about, then the Web site you go to is fanniemae.com. They’ll explain the program, and that’s the one where you pay 31% of your gross monthly income. It’s a very simple, straightforward, great program. If you have tons of credit card debt, if you had a business that failed and you run up $100,000 of credit card debt, you may be doing both a loan modification and a bankruptcy, you’ll want to just consult with a bankruptcy attorney about that. Sit down, talk to them, go over your situation with them and let them help you decide what’s right for you. Lot’s of people in America are in trouble right now; it’s been raining cats and dogs out there, and if you got wet, don’t be surprised. You’re out in the rain. The economy is raining. So don’t take it too personally, just do what you have to do get on to the next part of your life. If you want help from us, go to our Web site at www.antibankattorney.com , and it’ll give you a free pdf download of the first couple chapters of the book. If you want to get the rest of the book and the course and the life guidance, I’d be more than happy to help you out with that.