Are mortgage companies really reducing principle balances on homes that are in foreclosure?

Asked by Frankie, Mission Viejo, CA Sat Jan 17, 2009

I'm being told by a rep at Infinity Group Services of Irvine who has supposedly qualified me that the mortgage companies have to modify loans becasue of legislation that was passes which includes reducing principle to the market value of the home. Here is an example they sent to me...John Martin’s loan is presently in default, or reasonably foreseeable of near default. The house he previously bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted to $375,000. While Mr. Martin can no longer afford the $9,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:
a) New Loan Amount: $330,000.00
b) New Interest Rate: 6% fixed
c) New Loan Length: 30 years
d) New Payment: $1978.52

Is this true?

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J R, , New York, NY
Sun Jan 18, 2009
What will they think of next? If I paid 40,000 for my car two years ago, and I owe 30,000 now, but the car is only worth, 25,000 now, I wonder if I can renegotiate what I owe. Ridiculous.
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Sun Jan 18, 2009
Lending Answer:

The only loan modification program available in which lenders reduce principal is FHA"s Hope For Homeowners. Under the program, lenders may receive an FHA guarantee if they reduce the balance of the loan to 90% of appraised value, and if the borrower qualifies for the other criteria.

1.) Lenders have informed Congress several times they are not interested in Hope For Homeowners until every other modification program is attempted.

2.) HUD reports that out of the 400,000 or so homeowners they expect the program to aid, fewer than 230 loans were started by end of 2008 and ZERO closed.

3.) A lot of mortgage brokers are soliciting borrowers for loan modifications using Hope For Homeowners. Unless you are working DIRECTLY with your loan servicer, any offer made to you to reduce principal balance is unenforceable.

4.) Under no circumstances should you pay any fee whatsoever for a loan modification until the modified loan closes. In many states the practice of collecting advance fees for loan modification is illegal. California has special licensing rules. Federal law makes it illegal to collect an advance fee in connection with an offer of an extension of credit if the offeror implies a guarantee or implies "substantial success rates" the credit offer will be approved.

Be very careful. California is rumored to be investigating hundreds of loan modification companies for fraud. The Fedsare overwhelmed with complaints. Contact your lender directly or hire an attorney who specializes in real estate matters. Assume anyone who solicits you for a loan modification is interested in one hing only: getting a fee out of you.
1 vote
James Gordon…, Agent, Hamilton, OH
Sun Jan 18, 2009
Frankie of the few loan mods that I have seen the lender makes the payment affordable but does not forgive any debt. The loan has become a 30 fixed at a DTI that the borrower can afford with the unpaid princilpe tack on at the end like a balloon.

As for the truth in their example why would a lender gift the person going into forclosure 45,000.00 in equity? If the appraise value is 375,000.00 I can not see a lender agreeing to rewrite the loan to 330,000.00 it just does not make sense.
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1 vote
Diane Wheatl…, Agent, Upland, CA
Sat Jan 31, 2009
I read the exact same example and according to that report it appears not only is possible it is mandatory in California. He stated his facts, statutes, codes, etc. to support his finding. I have not verified the legislation behind it myself. But, that is what the man says!
0 votes
., , Los Angeles, CA
Sat Jan 31, 2009
Pursuant to GAAP FASB -what you paid for the asset (automobile or home) is the accumulated basis in that asset. The outstanding balance or lenders basis in the mortgage along with a secondary quagmire and the notion of applying market risk to housing values is not something a lender can control. THERE NOT EVEN LENDERS SO KEEP BELEIVING IT.

So TJ is correct as well. The added notion of a lender, RE broker and a mortgage loan specialist putting a migrant worker earning $2,000 a month into a 100% CLTV mortgage obligation and upwards of $1.0 million home is equally if not more absurd. The fact the trustors (B-o-r-r-o-w-e-r-) here had a 760 score allowed the three parties to use Cart Blanche to create a predatory loan. Commissions $$$$$ Commissions $$$$$ Commissions $$$$$ I don’t know the circumstances for the above question. I believe the civil suits and damages award for the foreclosure victims against the three parties mentioned could really add up.


Forget the brokers – their escape latch for the criminal acts of the other Big Three from (2004 through 2009, yeah – it’s still going on). We actually like brokers – put canaries in a cage and they all start to sing! And what stories they tell. You see you cannot prevail in the long run (2004-2008) after giving the gift of both homeownership and foreclosure. It is a crime. If you engaged you’re the cause and your are enjoined in the madness and need to be accounted for. And yes...the new legislation will give a BK judge the right to reduce the mortgage by what ever the courts sees fit! ....20% 50% 80% or free and clear by releasing the lien. Ridiculous, you say what! Now why.......The parties to the financing and sale have different roles but share the same name - - - Defendants!

Oh, and yes contact your lender directly and wait 6 months while that short sale offer turns to foreclosure. Oh, hire an attorney who specializes in real estate matters and do what? Forget Pal - If you do not litigate you have no shot, understand, no shot of getting jack! Statement - Assume anyone who solicits you for a loan modification is interested in one thing only: getting a fee out of you. Hmmmm - That's right, so see an attorney who might just charge double the delinquency amount due for a retainer.


( – give it a rest as the Broker issue will not shift the Feds from their real focus - on something bigger, a far bigger picture).Really I cannot take much more. Good Luck.....then again....
0 votes
Coastal Short…, , Orange County, CA
Sun Jan 18, 2009
Frankie....the example you give above is very different from the example IGS has on their website, so I would definitely advise you proceed with caution. There are definitely solutions out there for homeowners that qualify for help, but the example above sounds a little to good to be true. Karen provided some great information can visit the HomeOwnership Preservation Foundation at for more details. You could also talk to your lender directly, feel free to visit the resources page of our website to get more detailed information about each lender and the programs they offer.
0 votes
Karen Parsons…, Agent, Laguna Beach, CA
Sun Jan 18, 2009
Hi Frankie, another answer mentioned, lenders can work with you for the Hope to Homeowners FHA loan mod. You can do this with your current lender or a new one. In order for the lender to have government backing of these new loans, they have to reduce the balance to the current market value. You agree to equity sharing as part of this too. So in the first year, if you have to sell the home, you get 0% of the equity. It increases by 10% each year until year 5 when the government gets 50% and they continue to get that 50% equity for the life of the loan.

Other loan mods are better for you depending on your situation. There were some really bad loans out there and most lenders realize it. You can really do this yourself. But it's uncomfortable, and so if you want to pay someone to handle it, you can. My understanding in California is that the only loan mod companies who can collect a fee up front are attorneys. If you do use one of them, I would make sure they offer a refund/partial refund if they can't help you. If your other option is bankrupcy, you might find one who does both, it will save you money in the end.

If you have a job and steady income, and would normally be considered a good risk, then the lender will want to work with you. I've seen many different types of work outs. If the first and second is with the same lender, I've seen them wipe out the second. I've seen 40 fixed at 4%, I've seen 5-year interest only loans then adjusting to 5.2%. There are lots of options. What I've recommended to my clients, there are attorneys out there who offer a free evaluation of your situation. I have a couple I them and talk about your specific situation, they will go over your credit, income, loan, other credit obligations etc...then they will give you an idea of what they think they can get from the lender you have. This will give you an idea what to ask the lender if you want to go it alone, can always pay them to do it.

I hope this helps! I have buyers who I helped buy in the past few years that are now in over their heads....I'm trying to stay on top of this to help. As a Realtor, I only get good will out of this, but that's OK with me. If you'd like to talk, feel free to call/email me directly and I'd be happy to give you some direction.

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