photo credit: alan.stoddard

The Kansas City Star recently reported about Kyna Franklin who received help saving her home from foreclosure.  (See full story here.)  The details aren’t specific, but part of this foreclosure appears to have involved a request for a loan modification.  The Obama administration instituted a program to encourage lenders to modify loans–usually by lowering interest–in an attempt to curb the growing foreclosure problem.

But some lenders have used this program as a way to “steal”  homes that have a good deal of equity.  Here’s the scenario that happened to a friend of mine:

He was current on his payments with a good credit score and about $20K in equity, but he is self-employed and his income has dropped.  He contacted the lender and asked to do a loan modification.  He was told that mortgage payments couldn’t be received by them while his request was being processed.  He made his payment anyway, but the lender returned it.  At the end of the month, he received a call from a friend who buys foreclosures at auction.  His house is being sold at auction by the lender, who has foreclosed on his home.

Unfortunately, he found that he is not alone.  This lender did the same thing to many others in Missouri.  The attorney general is looking into it, and pressing charges.  But in the meantime, I had to help my friend move out of his house into a rental.  His credit dropped over 100 points, and he’s left wondering how something like this could have happened.

My friend’s story may not be the norm.  There may be lenders out there who aren’t preditory.  But it gives me pause.  I think that anyone thinking about asking for a loan modification should do some research about the process before jumping into waters that may be teeming with sharks.