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Lenders may be required to reduce mortgage principal balances

Many Florida homeowners are currently facing - or soon will be facing - foreclosure. In many of these cases there are options available, including attempting to obtain a mortgage modification, which can be particularly helpful to those who are "underwater" on a home mortgage.

A mortgage modification can help by lowering interest rates, changing from a variable rate to a fixed rate or extending the loan period. All of these modifications will decrease monthly payments. However, in some cases, a decrease in the principal amount owed is also even a possibility.

Mortgage lenders have, in fact, reduced the principal mortgage balances for 100,000 borrowers, and state attorneys general have even been trying to require U.S. banks to consider more principal balance modifications. So far, the banks have been resisting such efforts.

However, the nation's top five largest home mortgage servicers are meeting with the state attorneys general in Washington D.C. this week. The parties hope to reach a settlement agreement regarding a 50-state investigation into mortgage lending and servicing practices. The investigation came as a result of the predatory lending practices of some mortgage service providers.

The meeting will address a recent proposal by the state attorneys general that would require banks to reduce principal amounts owed on loans. This requirement will be in effect for any loan in which a principal reduction will yield a higher return to the bank than foreclosure or another form of loan modification.

The proposal would grant a principal reduction over a period of three years, and the reduction would only continue if borrowers make steady payments. Supporters of the proposal argue that borrowers are less likely to re-default after receiving a reduction on the principal balance on their mortgage, and that these modifications are far more likely to have long-term success in keeping people in their homes.

Two of the major banks said that they are not opposed to reducing home balances for certain borrowers. However, they do not want to agree to blanket cuts. They fear that borrowers will simply stop making payments in order to receive a principal reduction.

With many of Florida's homeowners currently underwater, mortgage modifications that provide a reduction of the outstanding balance of a loan would offer much needed relief.

Source: The Wall Street Journal, "Mortgage Faceoff Looms for Lenders," Ruth Simon and Nick Timiraos, 28 Mar 2011

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