Monday, April 19, 2010


Today, I will be a Volunteer Lawyer at Nassau Supreme Court for Mandatory Settlement Conferences through the Nassau County Bar Association. I am sure that one thing that will be requested by homeowners this time will be mortgage principal reductions but to present another side of this is the following article:

"On March 26, 2010 the Obama Administration announced major revisions to the Making Home Affordable Program. One of these deals with writing down the amount that people facing foreclosure owe on their loans.

As the foreclosure crisis has continued, property values have dropped in many areas of the United States. One problem that exists is many people owe far more on their loans than their homes currently are worth.

In situations like this some people facing foreclosure are not motivated to try to save their homes. They feel that they will never be able to recover what they pay for their home. So they walk away and let their mortgage company foreclose.

Members of congress and various consumer advocacy groups in the past had been unsuccessful in their attempts to get mortgage companies to lower the balance owed on these loans to an amount closer to the value of the home. The thinking here was that if this were done, the people would be more motivated to try to save their homes.

The revision to the Making Home Affordable Program announced on March 26 requires mortgage companies to consider writing down the principal balance for certain people who have applied for loan modifications. This is supposed to be done if the balance owed on a loan is greater than 115% of the current value of the home.

Say the value of a home is $100,000. The amount currently owed is $130,000. The mortgage company is being urged to reduce this to $115,000.

The mortgage company would run a New Present Value Test. As long as that indicated it was worthwhile to reduce the balance of the loan, the company is supposed to do so.

The mortgage company would initially put the amount to be reduced into a separate forbearance account. As long as the person remains current on their loan payments, the mortgage company will forgive the amount reduced in 3 equal payments over 3 years.

Let's look at our example above. The mortgage company would reduce the amount owed by $15,000 from $130,000 to $115,000. As long as the payments were made on time, the mortgage company would forgive $5,000 a year. The entire $15,000 would be forgiven at the end of the third year.

Those people who have already received a permanent loan modification or are currently in a trial loan modification period will be considered for a principal write down like this as long as they are still current on their monthly payments. Mortgage companies probably won't be able to get to these cases until later in 2010.

The Obama Administration is giving mortgage companies an incentive for doing this. They will pay them $.15 on the dollar for the amount that they reduce the loan by if the balance on the loan is from 115% to 140% of the value of the home. If the balance of the loan is greater than 140% of the balance of the home, they will pay the mortgage company $.10 on the dollar for the amount reduced.

If the balance of the loan is less than 115% of the value of the home, The Obama Administration is giving the mortgage company an added incentive. They will pay them $.21 on the dollar for the amount reduced.

Going back to our example, the loan balance of $130,000 is 130% of the value of the home ($100,000). The amount that the balance is reduced is $15,000. So the mortgage company would be paid $2,250 (15,000 X $.15).

If you are facing foreclosure, you may be thinking that this is great. The balance on your mortgage is far higher than what your home is worth. So your mortgage company is going to reduce it to 115% of the value.

Well there are certain problems which will arise. These were not addressed in the revisions announced on March 26.

The first is that this is voluntary for the mortgage companies. What happens if some elect not to do this?

The second is that there is no time limit for the mortgage companies to put this in place. Are the mortgage companies going to delay implementing this? Will we see the same type of delays that have plagued the Making Home Affordable Program from the start?

The third is that the mortgage company or investor will contact those people who are eligible for this. Do you know who the investor on your mortgage is? Not many people do. By the way, the mortgage company to whom you are sending your monthly payments is normally not the investor.

How will your mortgage company or investor determine who actually qualifies for this? Will anyone monitor them to make sure this is done fairly? What if some mortgage companies do this quickly and others drag their feet?

Fourth - What happens in those instances where there are two loans? It looks like the administration assumed that most people who have a first and second loan got these through the same mortgage company. So the balance on the second loan will be reduced first. If the remaining balance is still over 115%, the balance on the first loan is reduced.

The guidelines indicate that a mortgage company that has to reduce the balance on a second lien to bring the total down to 115% will be paid $.06 on the dollar for the amount reduced. This payment will only be made if the person had not made a payment on that second loan in more than 6 months.

Let's look at the example we have been using. The balance on both loans totals $130,000. The balance on the first mortgage is $109,000. The balance on the second is $21,000. The value of the home again is $100,000.

115% of $100,000 is $115,000. The balance on the second loan would be reduced to $6,000. The balance of $109,000 on the first loan would remain unchanged.

If there was a different mortgage company for the second loan, they are being asked to forgive $15,000 of their loan. For that the government may pay them $900 ($15,000X$.06). They will get that only if the person facing foreclosure has not made a payment on that loan in the last 6 months.

So the mortgage company here can possibly get $900 at the most while in those instances there is only one loan, the mortgage company there would get $2,250 regardless of when the last payment on that loan was made.

Is there anything wrong with that picture?

It sure looks like the mortgage company handling the second loan is getting the shaft. Do you think that most mortgage companies on these second loans are going to willingly participate in this program?

Current estimates are that in about 50% of the cases where people are facing foreclosure first and second loans exist. It is not clear on how many of these two different mortgage companies are involved. Chances are the percentage is high.

One other big challenge exists for mortgage companies when it comes to reducing the principal balances on loans. If they start doing this for people facing foreclosure, won't the people who have made their loan payments on time and are not facing foreclosure complain? Won't they demand that the balance on their loans be reduced if the value on of their homes has dropped?

When the Obama Administration announced the revisions to the Making Home Affordable Program on March 26, the news media focused on this one. Their stories just focused on mortgage companies reducing the principal balances on those loans of people facing foreclosure whose properties had dropped in value. They did not go into detail on the guidelines for the revision.

People facing foreclosure who are in this situation had their hopes raised that their mortgage companies would be reducing how much they owed on their loans. Many will be disappointed if the problems I mention here occur prevent this from being done.

It looks like the Obama Administration has opened itself up to much additional criticism because the guidelines for this revision to the Making Home Affordable Program were not well thought out.

As a real estate investor since the 1980's Mark Elkins has seen the devastating impact foreclosure has had on common ordinary people. This has led him to study and gain much knowledge and insight into how to help people in foreclosure to take the offensive, reverse the process, save their home and minimize their losses. Please visit his website, Please check out his blog at

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