Where are all the Principle Reductions?

A big question I get is whether principle reductions--that is, lowering the balance owed on your mortgage--are available, and if not, why not.

The answer to the first question is generally, no. Most (responsible) foreclosure defense and loan modification attorneys will tell you that principle reductions are not being offered by banks. The current governmental modification programs, like HAMP, do not have a principle reduction component.

Principle reductions would stimulate the economy. People who purposely default on their mortgage would remain current, knowing they were now paying for a house that is even in value. Lowered principle would mean lowered payments, making homes more affordable for those in foreclosure. All this means fewer homes in foreclosure, which raises everyone's property values.

So why hasn't it happened?

1.Tax Dollars - any plan where banks reduce principle, would need to be incentivized by giving something to the banks--and that something would be money that likely comes from tax dollars. Like it or not, the mood of the country is not in favor of more spending, even if it would help the economy and those most in need. If the Congress was willing to allow the US to go into default on its debts a few months ago just to avoid more spending, it certainly wouldn't be willing to give taxpayer money to lower mortgage balances.

2. Snowball effect - the very real concern that principle reductions would lead to people who are paying their mortgage, to purposely default, in order to get the benefits of the program. Now you could possibly have made a bad foreclosure crisis, even worse. And it would be impossible to financially account for the hundreds of thousands of homeowners that would purposely default.

3. Investor guidelines - many loans that are included in mortgage backed securities or securitized trusts, have investor guidelines that would not allow them to lower principle, no matter how enticing any government incentive may be.

There are still two avenues of hope:

1. Many state attorneys general are considering principle reduction as a part of settlements with major loan servicers for the robo-signing and foreclosure fraud scandals:

http://www.housingwire.com/2011/10/24/hud-robo-signing-settlement-to-accelerate-principal-reductions

2. There remains a push in congress to allow judges in Chapter 13 bankruptcy proceedings, to lower principle.

Until then, you'll need to make a decision what you want to do. Remember that even if you don't think your home is worth keeping, walking away could subject you to a large deficiency (monetary) judgment.

Questions? Feel free to contact us at 954 987-0515 or www.weaverlegalgroup.com