Up for the quarter, down for the year? See what's happening with home affordability in our latest "Income you need to buy a home in the top 50 metro areas".

Up for the quarter, down for the year? See what's happening with home affordability in our latest "Income you need to buy a home in the top 50 metro areas".

How Not to Write a Loan Modification Hardship Letter

In 2008, a homeowner named Dan Bailey got a lot of publicity for writing a hardship letter to Countrywide's chairman, Angelo Mozilo, trying to induce the lender to approve a loan modification. That e-mailed letter--and Mr. Mozilo's response--became very public when Mozilo added some uncharitable remarks and then inadvertently hit "reply all" instead of "forward." But as long as that letter is out there, it should serve as an example of how not to write a mortgage modification hardship letter. Here's how to avoid what Bailey did.

Your Objective: Get a Loan Mod, not Make the Servicer Cry

Here is how Mr. Bailey opened his letter:

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.

When writing a hardship letter, borrowers should refrain from expressing personal problems -- such as a history of drug or alcohol abuse -- as it's not necessarily relevant to your request. Keep in mind that all you need to convince a servicer of is that your request -- whether for a forbearance, deed in lieu of foreclosure or mortgage modification -- is necessary to allow you to honor the terms of your mortgage.

Don't Write a Novel

A novelist builds up suspense by hinting at what's coming up, but your hardship letter should be short and specific -- don't tease the loan modification staff who will be reading your letter along with many others. Mr. Bailey's letter fails again because his statements are so general. "Everything in my power" and "fallen short" explain nothing. The irrelevant narrative provides nothing of value to the time-pressed employee who is trying to make some sense of the plea. His letter goes on:

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. 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.

Don't Pull the Lender's Leg

Don't try to claim you were misled; it's just not believable. Furthermore, the statement about the credit rating being destroyed probably won't fly either. Know that the servicer has access to your credit report right there, and self-serving statements that aren't true won't help your cause. It looks like Mr. Bailey is sinking money into an unsuccessful business which he can't afford. In addition, he should not broadcast the fact that he doesn't have medical insurance and has health problems--those facts only serve as red flags to the servicer that, even if he were to get a loan modification, his new mortgage terms are unlikely to stick.

So, How Should Mr. Bailey Have Written His Letter?

A good letter is succinct and lets the servicer cut to the chase:

To Whom it May Concern:

I am writing this letter to request a mortgage modification that will allow me to continue to make my mortgage payments. When I was approved for my loan, my gross income was $4,000 per month, and my mortgage payment was $1,000 per month. After becoming injured and losing a part-time job, my monthly income dropped to $3,000, and my ARM payment adjusted upward to $1,500 per month. My mortgage payment is now 50% of my monthly income. I have used my savings to keep up with my mortgage payments, but that resource will soon be exhausted. A back injury makes it unlikely that I'll be able to resume my part-time work (I can document my medical treatments and the prognosis). I have done some calculations and have determined that I could continue to honor my obligation to you if you were to grant me a payment reduction to $930 per month.

I can be reached at (xxx) xxx-xxxx or by email at [email protected], and will gladly supply any documentation you require.


Dan Bailey

This letter works well because it explains what lenders need to know -- exactly what happened (a significant reduction in income, coupled with an increase in your interest rate), what effect it had (the house payment increase to an unaffordable 50% of the borrower's income), what the borrower can do or has done to increase income or cut expenses (nothing because he is unlikely to be able to get another second job) and what concession the borrower needs from the lender (a payment decrease to $930, which is 31% of his gross income -- the percentage lenders use to calculate your new monthly payment under the home affordable modification program [HAMP]).

Try to keep your letter to a single page, and include income and asset documentation (pay stubs, bank statements, and other relevant paperwork).

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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