This is another myth that is being perpetuated by so called loan modification experts and/or real estate attorneys. They throw this teaser out to please the itching ears of distressed homeowners in the hope that these consumers will sign on to pay thousands of dollars in modification fees.
In theory, mortgage principle reductions are a viable part of any lender’s loan modification arsenal.
In reality, less than 1% of all mortgage modifications include this type of workout solution. Your lender is willing to reduce your interest rate and reduce your mortgage payment. They are also willing to put all the delinquency and fees (including late payment fees, modification fees, attorneys’ fees, escrow fees and any and all other fees including accrued interest) on the back of a customer’s mortgage. However, they are rarely inclined to reduce a struggling homeowner’s outstanding balance.
Even as late as February 2009, around 10-15% of my clients had obtained a principle loan balance reduction. In these instances the lender would trim anywhere from 20% to 30% off the amount due. Since then, lenders have been less willing to negotiate these types of breaks for consumers. Let us examine why this is the case.
First of all, the new President rolled out his “HAMP” plan. John Schoen, a Senior Producer with msnbc.com wrote, “Launched last March as part of the Making Home Affordable initiative, HAMP was the Obama administration’s flagship program to halt a wave of foreclosures that two previous government programs – The Hope Now Alliance and Hope for Homeowners – had failed to slow.” Since Obama’s program went into effect, principle reductions have almost ceased to exist. This is due in large part to the fact that this program does not incent lenders for performing such debt relieving tasks. The government pays a subsidy of up to $4,000 for each mortgage a lender modifies, but it does not require that the lender perform any principle reduction.
Secondly, loss mitigation insiders report that the delinquency rates of first time modifications are still hanging around 60%. In layman’s terms, even when a struggling homeowner obtains a successful loan modification, sixty out of one hundred still go at least thirty days delinquent on their reduced payment Since most homeowners do not live up to the new modified loan terms, their lender does not see a need to reduce loan balances.
What is a homeowner to do? The easy answer is to throw in the towel. The practical answer is to fight tooth and nail for a mortgage modification, and this includes requesting a principle reduction.
In order to obtain this type of assistance, the consumer needs to ask. Request that your lender order a BPO (Brokers Price Opinion). Once your lender has an idea as to what your home is worth, they might actually entertain this workout option.
For example, if your loan balance is $100,000 and your home is only worth $75,000, your lender could reduce your mortgage balance down to market value. This would decrease the amount owned by over $25,000. In tandem with a rate reduction, this client would get substantial payment relief.
I believe most lenders would be willing to entertain principle reduction, if the government would get out of the way. For the near future, this does not seem promising, and principle reductions will be few and far between.
The silver lining is that we can only deal the hand we are dealt. If you apply for a loan modification, you might as well request a BPO and see if your lender is willing to play ball. Most lenders will consider mortgage balance reduction on a case by case basis. Who knows, you might even be one of the lucky ones.
About the author. Randy Thornhill is founder and owner of Thornhill Financial Group, Inc. TFG, Inc. has been in business since April of 2005. We specialize in conventional lending, loss mitigation, and commercial lending. We have an “A” rating with the BBB (Better Business Bureau). Our management team has over 50+ years in the mortgage industry. Our Easy Loan Modification Guide will walk you step by step through the loan modification process. What makes this a unique product is that we have a 24/7 Customer Help Line. No other “Do it Yourself” Loan Modification Kit OFFERS THIS IMPORTANT SERVICE. Anytime during the modification process, you can speak with one of our accredited loss mitigation specialists. They will be happy to answer your questions and provide advice. We now do “Principle Reduction Mortgages”. Please visit our web site at www.easyloanmodificationguide.com or call us at 1-877-262-6315.