Thursday, May 22, 2008

How Not to Write a Hardship Letter

by Tanta on 5/22/2008 08:26:00 AM

It is inevitable that we would join the mirth all over the rest of the toobz regarding The Tanned One's unfortunate use of the "reply" rather than "forward" button in the process of registering his "disgust" with a borrower who emailed some 20 Countrywide executives (including the press office) with a request for a mortgage modification based on a form letter he found on the net. Moe Bedard, whose advice on approaching his servicer this borrower faithfully followed, wasted not a moment in "reaching out to the media" with this story, managing to land it in the LAT yesterday.

As a PR stunt, there's not much you can criticize here about Mr. Bailey's letter or Moe's media-savvy frothing in response. Angelo just handed these folks a dose of self-righteousness that will keep them stoned for weeks. The problem here, of course, is that if you are a borrower in distress trying to work something out with your servicer--Countrywide or anyone else--your primary need is not sympathy from the senior execs or attention from the press office or a flap in the newspaper. Your primary need is to reach a person in default servicing who can do something about your problem. This person needs to understand very clearly what your problem is and what can, practically, be done about it. At the risk, therefore, of sounding like a shill for Countrywide (this is a blog in-joke; every time I write something insufficiently hostile to CFC I get accused of being an "industry shill"), I offer to use what insight I have into the minds of loss mitigation specialists who deal with these things to offer some advice on how to write a letter that runs much less of a risk of being dismissed as just another sympathy-seeking form-letter.

* * * * * * * * * *

First of all, your goal is not to convince the servicer that you deserve a loan modification. Some people can't quite get a handle on this point, but you need to. Your goal is to convince the servicer that what you are asking for--in this case, a modification, although it could be a deed-in-lieu or a short sale or just a temporary repayment plan--is 1) necessary given your financial situation and 2) going to work. The biggest problem I have with Mr. Bailey's letter is that it does not ask for anything specific and it does not help me see why a modification would actually work in his case. In fact, it makes the mistake of suggesting that a modification would only allow Mr. Bailey's shaky income situation to continue or get worse. That being the case, it doesn't really matter if the person reading your letter feels sympathy for you or believes that the situation was truly beyond your control.

Let's start at the beginning:

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity and I would really appreciate the opportunity to do that. My home is not large or in an upscale neighborhood, it is a “shotgun” bungalow style of only 900 sq. ft. built in 1921. I moved into this home in May of 1992…this was the same year I got clean and sober from drugs and alcohol, and have been ever since, this home means the world to me.
The first sentence of this letter encapsulates what's wrong with it: it is going to be about "explaining" "unfortunate circumstances." The fact is that every letter every Loss Mit specialist in the universe gets from borrowers is about "unfortunate circumstances." It is quite rare to get a letter from someone that says "Look, I'm a selfish irresponsible pig, but I want more from you than I already have." Trust me on this. Everyone who talks to the Loss Mit department has "unfortunate circumstances." That is what the Loss Mit department is designed to deal with.

It is very hard for people in financial distress not to focus on their own misery, or to imagine that the "uniqueness" of their misery is not really the point. You need to get beyond that. You may think it is "unfair" that your story sounds more or less like everyone else's. Life is unfair. Servicers do not modify loans because they feel sorry for you. They modify loans because you have convinced them that you will be able to make payments that way.

A much better first paragraph would be: "I am writing to request that you consider a modification of my delinquent mortgage loan so that I can continue to make payments. I have tried to analyze my own situation objectively, and I believe that a monthly mortgage payment of no more than $xxx would allow to me to keep current on my mortgage and my other necessary obligations. I am a long-time homeowner and am committed to staying in my home if we can work out terms that are practical for both of us."

Starting out by addressing head-on what payment you need in order for this to work accomplishes a couple of things: it shows that you are, indeed, thinking practically about your situation. It gives the Loss Mit people a clearer idea of what you want. And it (hopefully) sets a tone that keeps you from degenerating into irrelevancy or sympathy ploys. No one needs to know that you had a booze or drug problem prior to 1992. Certainly no one needs this hint that your property is old, obsolete, and probably filled with DIY "remodeling." Not given what we see in the rest of the letter.
The main reason that caused me to have a hardship and to be late is my misunderstanding of the original loan. I was told that after the first year of payments, I would be able to refinance to a better fixed rate- then the bottom fell out of the industry. My payments for that first year were on time. I also lost my second income due to physical conditions in a very physically demanding industry.
Where to start with this? It simply sounds too vague to be believable, even if you think a Loss Mit specialist will be moved to modify your loan because you were told you could refinance. If you feel you need to include such information, I'd try this: "I refinanced my home in [month of year], and I made the mistake of relying on the broker's oral assurance that I could refinance it in a year to lower the payments. After making the first year's payments on time, I contacted my original broker again to apply for a refinance. I was told that I did not qualify because [specific reason given by broker]. I inquired about refinance opportunities with two other companies, both of whom told me [the truth goes here]. It appears that the only way I can lower my payments to a tolerable level is to request a modification."

This would show that you did indeed attempt to refinance, that you paid attention to what you were told the second time, and that you have some understanding of what your options are. The original letter simply blames everything on the loan officer who wrote the original loan and sounds a little too pat--"the bottom fell out of the industry" does indeed sound like something you read on the Internet. Once again, this writer is asking for sympathy, not presenting himself as someone who has made a good-faith effort to rectify the problem himself.

As far as "I also lost my second income due to physical conditions in a very physically demanding industry," you're much better off being factual and specific there--especially since, if you do get a Loss Mit specialist assigned to your case, you might be asked for documentation of income in the last two years. A much better approach (assuming, of course, it's true) would be: "I took a second job as a part-time bricklayer in [month and year] to help make ends meet, but I suffered a back injury in [month and year] that meant I could no longer do physically-demanding work. There are no second jobs available to me now that pay more than minimum wage, which is not enough for me to meet all my current obligations." If you got fired, you should either admit it frankly or leave the whole detail out. If you were laid off, say so. "Lost my second income" quite honestly suggests the worst to those of us who read letters like this all the time.
As my ARM payments increased, I have had less money to put towards making my business (income) work. I had been unable to generate business because all of my funds were going towards attempting to make my loan payments. This, coupled with major repairs to my vehicle (93 jeep) and paying out of pocket for medical and dental issues (I have no ins.) caused me to fall further and further behind, destroying my credit rating.

Now, it’s to the point where I cannot afford to pay what is owed to Countrywide. It is my full intention to pay what I owe. But at this time I have exhausted all of my income and resources so I am turning to you for help.

I feel that a loan modification would benefit us both. With that, and knowing my home will not be foreclosed, I would be able to obtain a roommate in order to generate more income, have the funds to generate more business and have a good working relationship with Countrywide. I would appreciate if you can work with me to lower my delinquent amount owed and payment so I can keep my home and also afford to make amends with your firm.
Here's where the wheels really fall off this letter. I need to know what kind of business you are in, and why it requires you to spend money on it, and what kind of money we're talking about. As written, this letter suggests that you need your mortgage payment reduced so that the monthly cash-flow can be "invested" in a business that doesn't seem very successful. Why does Mr. Bailey think that the lender would conclude, in this case, that a modification would work? And this is, actually, the point at which one wonders what happened to the proceeds of Mr. Bailey's latest refinance. Apparently it didn't go into home improvements; did it go into a failing business? That does happen a lot. Will it help to, in essence, do it again by means of a modification?

It is certainly OK to mention unexpected expenses that have arisen lately--like the car repair and the medical bills--but I would caution anyone about claiming that that "destroyed your credit rating." The first thing a servicer is going to do is pull your credit report. If you can supply the car repair invoice and medical bills (or cancelled checks), showing that these expenses were incurred just before delinquencies began appearing on your credit report, you may indeed help the servicer see that the issue here is unforeseen expenses. But you need to be honest with yourself: if your credit history was a mess before those expenses popped up--which is likely the case for Mr. Bailey, I fear--then you don't help your case by writing something like this. The person reading your letter can see your credit report.

Finally, suggesting that you would take in a boarder if you got the modification won't help you much if you need boarder income to qualify for the modified payment. And how much would a boarder pay? How much of a difference would it make?

The big problem with this letter is that Mr. Bailey doesn't simply present a budget and a proposal. The letter needs to say something like this: "My current income is $xxx per month. My monthly expenses [itemized] are $xxx per month. I believe I can add $xxx per month to income by taking in a boarder. That means that I can continue to pay my mortgage if we can reduce the monthly payment to $xxx." The bottom line is, if you cannot write something like that because you cannot come up with a set of numbers that work (and can be verified), you really have no business asking for a modification. If you can come up with reasonable numbers that work, it only helps your case with the servicer to come across as someone who has taken a clear view of the monthly budget and can suggest a concrete plan.

Finally, if you are going to email or fax a letter like this, you need to offer to provide whatever documentation the servicer needs in a follow-up letter. A simple way to do this: "Please let me know what financial documents you will need from me, and where to address them so that they come to the attention of the right person." Quite honestly, the offer to work cooperatively and promptly with the servicer in a specific way is worth any number of rhetorical flourishes borrowed from some Internet form letter.

There are some unfortunate comments over on Moe's site about this letter, the burden of wisdom of which is "not everyone is a college grad or trained writer, you know, so people use form letters and shouldn't be criticized for it." Let me tell you that the biggest problem Loss Mit folks tend to have with borrower letters is not that they don't have the old college polish. The biggest problem is that "explanations" for delinquencies are not actually the same thing as proposals for a successful workout. Nobody cares about rhetorical flourishes; Mr. Bailey's modification will stand or fall on the question of whether it is likely to keep him out of foreclosure, and that stands or falls on whether he can afford the modified payments out of his current income.

To be just as honest as I can, I don't think I would have used the term "disgusting" for Mr. Bailey's letter, as Angelo did. However, the term "bullshit" did pop into my underwriter's mind as I read it. That was in part because of the "form letter" quality of some of it; it was also because Mr. Bailey's discussion of his income situation is so muddled. I write this to suggest to Mr. Bailey, and anyone else contemplating sending such a letter, that this is a likely response from servicing people. I am not particularly defending it, you know. I was in fact trained as an underwriter years ago and we were in fact trained to not leap to conclusions and use the term "bullshit" loosely. (And to "forward," not "reply," but that's another matter.) So it's possibly quite "unfair" that I think Mr. Bailey's letter is unlikely to cut any mustard on its own (although now that it got Angelo in the papers again, he might get a more thorough hearing than his letter alone would have gotten).

But most people can't count on the CEO screwing up and winning the battle in the pages of the LAT; most people really really need to get somewhere with the actual servicing employees we have, not the ideal ones who never react badly to borrower pleas for sympathy. We are what we are. I suggest writing in your own voice, about the details of your monthly budget, sticking to the relevant facts, and trying as hard as you can to stifle the impulse to blame your problems on everyone but yourself. That doesn't mean you have to blame yourself; it means we're past "blame" at this point. You're in trouble; you need to work something out; you need to get on with a practical request. You are a flawed person writing to an undoubtedly flawed person. If you don't want the Loss Mit specialist to "fill in the blanks" in your letter from his or her own possibly cynical experience with other letters of this type, don't leave those blanks in it. That's the best advice I can give you.

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