Principal reduction

Posted by kevin on December 13, 2010 under Foreclosure Blog | Comments are off for this article

The problem with the current mortgage crisis is that payments on adjustable rate mortgages increased while at the same time the value of the property decreased.  The homeowner found herself “underwater” with higher monthly payments.

When the borrower defaulted, and the lender filed foreclosure, the difference between the amount due and the value of the collateral increased.  The question became, who was going to be responsible for the fact that the property was underwater.   Were the lender and the borrower going to share the loss in value, or was the borrower going to have to eat this loss?

In mortgage modifications from 2007 to present, the position of the lenders has been that the borrower is responsible.  So, if you borrowed $380,000 when your home was worth $400,000, went into default and now owe $450,000 but the property is worth only $300,000- tough.  The lender wants $450,000 even though if the lender went to foreclosure sale and then sold to a third party, it would only get $300,000.

That makes no sense.

For almost 4 years, mods have been difficult because of the lender’s position.  Why enter into a mod if you are going to remain underwater for 10 years or more?

There may be a hint that things are changing.  The Wall Street Journal had a blurb last week that Fannie Mae and Freddie Mac are starting talks with the Administration about principal reduction modifications.  Also, I have gotten in some mods for clients that have principal reductions over the $1000 per year for 5 years .  Of course, we have litigated those cases aggressively and perhaps become the squeaky wheel.

2 points: the first is to see if Fannie and Freddie make any changes to their policies concerning principal reduction.  Second, if you are in a foreclosure situation, aggressively contest it.  Be that squeaky wheel.  Yes, you will incur fees, but it may lead to a much more favorable settlement.