Can Your Bank Foreclose You While You’re Processing a Loan Modification?

Many homeowners are having trouble keeping up with their mortgage payments.  As a result, they are turning to their lenders, seeking loan modifications to find a way to reduce their monthly debt obligation.  Oftentimes, those homeowners have already stopped making mortgage payments.  Instead they are working with the lender in good faith to reduce their monthly expense.

Unfortunately, the banks take a long time to process loan modifications.  They are notorious for losing paperwork, asking for the same documents repeatedly, and not giving clear time frames for resolution.  In the meantime, homeowners are waiting with baited breath to see if they will catch a break.

However, many homeowners have found that they wait and wait and wait, only to find that the loan modification process essentially went nowhere.  Instead, while the loan modification application is still pending, the bank foreclosed on the home.  Since these homeowners were working with the bank in good faith, they are shocked when the home is suddenly foreclosed.

Can banks do this?  Sadly, the answer is yes.  If your loan doesn’t fall within the purview of the Home Affordable Modification Program (HAMP), then the banks can certainly “dual track” your loan.  In other words, while they are working with you to modify, they can also work towards foreclosure, assuming that there are no other state laws that prevent this.  On the other hand, if your loan modification does fall within HAMP’s requirements, dual tracking is not allowed.

The good news is that many state attorney generals and other agencies are working to fix this; they don’t want banks to “dual track”.  After all, homeowners are often blindsided when they lose their home to foreclosure, thinking that they were safe while the loan modification was processed.  So far, banks have agreed that they will halt foreclosure proceedings once a temporary modification is approved, but many regulators don’t feel that this is good enough.  Instead, they want foreclosure proceedings to cease during the modification process altogether.

It remains to be seen whether state attorney generals and regulators are able to stop dual tracking.  In the meantime, if you have applied for a loan modification, do not ignore any foreclosure notices you receive!