No Job? Can't Refinance? How to Talk to Your Bank

Homeowners who have recently lost their job are caught in a "no man's land" where they are struggling to make their mortgage payments but can't get help from either their lender or the government.

Peggy Shaw had been thinking about refinancing her Decatur, Georgia condo before she was laid off as a senior editor at a book publishing company last Thanksgiving. She has a $1,295 monthly mortgage payment and says she's barely keeping her head above water.

"I'm scared and I try to take it one day at a time," says Shaw, who is divorced with a son and daughter in college. "When I got laid off, I went to the bank to see if I could get my mortgage refinanced."

But Shaw says she was told that because she did not have a job, she couldn't refinance. The bank told her to keep checking back with them, which she had done.

Shaw isn't alone. More and more homeowners who suddenly lose their jobs are facing the scary realization that they can't pay their mortgage anymore. Many can't get the bank to refinance and they don't qualify for help under the new Obama mortgage rescue plan.

"Unfortunately, there's not much that they can do," says Edward Mermelstein, managing partner of Edward Mermelstein Development, who works with clients in residential and commercial real estate. "If you don't have income and are out of a job, you are very much limited as to what you can propose to the bank for refinancing."

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The government is offering financial incentives to lenders for loan modifications, but it's up to the individual banks to make the call, says Mermelstein.

"The banks have to figure out if they are going with the government's plan or not," he says. "Each bank has its own guidelines."

What You Can Do

As bad as the situation seems, there are some actions to take says Darek Spring, president of Smart Modification, a company he and his wife set up to help homeowners after both lost their jobs and wanted to refinance.

"I came out of years in the banking industry and found myself out of work," says Spring. "I tried to negotiate. We made dozens of calls and go nowhere for a long time.

The most common steps recommended by experts to take for renegotiating a loan for someone who's unemployed are:

• Find out who services the loan by contacting the bank or lender you pay monthly
• If the servicer cannot help after using the following steps, find out who actually owns the loan and deal directly with them.
• Call the servicer or lender immediately and speak to someone in the loss mitigation department as soon as possible about refinancing
• Write what's called a forbearance letter or postponement of payment letter to either the servicer or lender telling them of your situation
• Be prepared to provide documentation of unemployment or income loss of you or your spouse
• Keep accurate copies of anything you send to a servicer or lender

Spring, who kept his house, says the first step is to contact what's called the loss mitigation department of the lender. "Banks are trained to say 'give us money now' so you have to get beyond that and reach the mitigation department, says Spring."

It's also important to know who owns the home loan, says Steven Horne, CEO of Wingspan Portfolio Advisors, a company that services low value loans. There are several different participants on the lending side of the transaction," says Horne. The company that is servicing the loan is usually the one who can modify the loan. They may or may not be the bank you send your monthly check to."

There's another part of this process says Aime Jackson, founder of the non-profit organization Advocate Aime, set up to help homeowners. "Be relentless," says Jackson who faced foreclosure of her Texas home because of a bank error. "If you can reach someone at your mortgage company who is in a position to effect change and has the authority to approve the loan modification, there is hope."

And experts say to avoid businesses that offer to help modify a loan for a hefty price. "The foreclosure rescue space has a lot of people who are not the best around," says Horne.

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But if you do feel the need to have someone work for you, Smart Modification's Spring says do some diligence beforehand. "Good companies offer a 100 percent money back guarantee," says Spring. "Check out the company and ask for first hand testimonials."

Bank's Motivation

Analysts agree that the banks have a financial interest in modifying loans of the unemployed but not all mortgage lenders will do so. "Banks want you to have income," says Spring. "A typical modification plan might not include a drop in principal. More than likely they would put some of the money owed in refinancing at the back of an extended loan."

As Peggy Shaw continues to look for full time work, she's been freelance editing and writing to help her income. But that's not a solution to her problem she says. "There are times when I feel I could end up being one of those people who lose everything," says Shaw whose savings runs out in about 6 months. "I feel lost. All my money is in my condo."

© 2012 CNBC.com