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Do Mortgage Principle Reductions Really Occur? – Part Two

After I wrote the first article pertaining to this interesting topic, I continued to do some extensive research on this subject.

After much digging, I found a dirty little secret that your lender does not want to share with you. The fact is your lender will allow principle reductions in a few different instances.

If you do a short sale, you will be a candidate for a principle reduction. In most cases, both the buyer and seller can benefit. For those of you that do not know what a "short sale" consists of, you might find the following example to be interesting.

Say you owe $150,000 on a home that is now only valued at $100,000. You are behind on your mortgage, and you just can’t get caught up. You tried a mortgage modification to no avail. You really just want to get rid of your home and alleviate the burden that comes with homeownership. You are happy with the thought of renting your next home and getting your financial situation back on track.

Well, you need to list your home with a licensed Realtor and try to find a buyer. You will need to agree to have your Realtor list your home at or below market value. This will ensure a relatively quick sale. A good Realtor will focus on finding a buyer that wants a good deal and one that wants to close as soon as possible.

In this scenario, you get an offer on the house. A potential buyer has agreed to purchase your home for $90,000. If you agree, your Realtor will submit an executed sales contract to your lender’s short sale department.

This is where things usually slow down. Your lender may take three, five or even eight months to decide on whether to accept the offer. From their perspective, they are going to lose around $60,000 on this transaction. In the past, this was true, and this is why so many banks were not really motivated to approve a short sale offer.

Things changed when the current Congress allocated TARP funds, $5 Billion to be exact, to pay for "principle reduction" plans. In essence, the federal government is giving incentives to banks and mortgage lenders to approve short sale transactions.

In reality, your lender will not be eating the entire $60,000. In fact, 85%-100% of this large loss will be paid for by Uncle Sam. Thus, the max your bank will be out is $9,000, and in some instances, your lender will not lose one red cent.

The second scenario is for a homeowner to apply for and obtain a "principle reduction mortgage". These are very new and unique products that can become a lifesaver to struggling homeowners. This product only works if a homeowner wants to stay in their home.

With a short sale, a homeowner loses their home. With a "principle reduction mortgage", a homeowner gets to keep their home; pays off their delinquent mortgage; and receives a smaller mortgage and many times, a reduced mortgage payment.

For discussion's sake, we will use the same numbers as before. You owe your bank $150,000 on a home worth around $100,000. You go to one of the few companies that are licensed and certified to perform "principle reduction" services.

This new lender will order a BPO (Broker’s Price Opinion) or a full appraisal. Once completed, it turns out that your home is valued at $100,000.

With this information, the new lender goes to work on your behalf and negotiates a "buy out" of your current mortgage. They offer $100,000 for the note in which you still owe $150,000. In previous times, your lender would be out $50,000, so they most likely would not be interested in taking such a very large loss while allowing you to stay in your home.

This was before TARP money was set aside to assist distressed homeowners. Under this Fannie Mae mortgage buyout, your lender will entertain selling your mortgage note to another lender. The most they would be out is $7,500 because the remaining balance is paid off using TARP funds.

In the eyes of your bank, this is a win/win. They obtain almost the entire $150,000 pay off, and they get a delinquent customer off the books. This immediately impacts their bottom line and keeps the "number crunchers" happy. On top of this, they did not have to put a big liability on the books by obtaining a property through foreclosure.

Now, some of you might be skeptical or might just have some questions. Let me take a moment to address some of the big ones.

First of all, why would a lender do this for a short sale or for a third party when they won’t perform a principle reduction for me? The answer is simple. Your lender only receives this TARP (aka bailout) money if they move this liability off their books. In layman’s terms, they will not receive the federal funds if they reduce the principle of a current customer and continue to hold the mortgage note. Thus, they have to find someone (a buyer or a third party) to payoff your original mortgage note.

Now, you might be thinking, "this is too good to be true." Well, you are not alone. I thought the same thing when I first heard about this program late last year. However, after some thorough research, I found out that this is the real deal. You can find out more about this program by going to the Fannie Mae and/or HUD websites.

Can I do this on my own? Not really. You will need an advocate (i.e. your Realtor in a short sale or a licensed mortgage broker in the principle reduction) to work on your behalf. They are the experts at negotiating with lenders and assisting your lender in obtaining the TARP funds. Sometimes, you get what you pay for, so let the experts do the dirty work for you.

$5 Billion does not seem like very much put aside for this program. True, but as I write this, Fannie Mae and HUD are requesting more funds to be allocated for short sales and principle reductions. Word has it that as lenders show that they want to use these TARP fund for these purposes, the federal government is going to release more funds.

How long will this last? My inside sources tell me probably two years max. My gut tells me that it could be longer. As foreclosures continue to rise and more homeowners find out about this extraordinary program, the government will be forced to provide additional funds.

In closing, my firm has started to offer "principle reduction mortgages" If you are interested or just want more information, please feel free to contact me at 1-877-262-6315 (toll free) or email me at Rdthornhill@aol.com.

About the Author

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.

Why are foreclosures listed so cheap ??? What are their REAL prices?

http://realestate.aol.com/listings-Oakland-CA#/sort-price/order-asc/page-11

Those look like they might be redemption prices, how much was not paid. Foreclosures sell for about 90% of fair market value.

Without addresses it is hard to tell what the real prices are, but I will see if I can find an example and post it.

edit:

That took me awhile. They are pulling default notices and calling them foreclosures. Those homes are not for sale at all and have not been foreclosed on. The owners are late paying their mortgage, but that is the extent of it.

I found one real foreclosure, http://realestate.aol.com/foreclosures/Surrey_Ln-Oakland-CA-94605/4.32112323

However they are saying it is only 459,146 when the actual list price is $599,000

Listing the default notices seems to be a lure to get you to pay for information that is actualy free.

REALTORS BECOME REO LISTING AGENT FOR BANK FORECLOSURES