Mortgage Principal Reductions: Rare, But Not Impossible

As a result of the economic downturn and residential mortgage crisis in recent years, Floridians have been hit the hardest. According to the Daily Finance, 24% – nearly a quarter – of all home loans in Florida are delinquent, and 14% are in foreclosure.  After the mortgage lender files a foreclosure lawsuit in Florida state court, the lender is required to pay for and attend a mediation before proceeding with the lawsuit.  The goal of this requirement is to give the homeowner another opportunity to obtain a loan modification from the lender and bring the loan current.

Many homeowners apply for a loan modification or go into a foreclosure mediation expecting that the mortgage lender will adjust the amount of principal remaining on the loan to the home’s current value, given that an overwhelming number of homeowners in Florida and throughout the country are upside down on their mortgages.  For example, if someone purchased a home in 2007 at the height of the housing market for $300,000 and obtained a mortgage for $295,000, she may ask the bank to adjust its principal loan amount to $150,000, which is the home’s current market value.

Unfortunately, while many banks may offer reductions on interest rates and extensions of the loan term to 30 and even 40 years, few banks are willing to reduce principal.  However, there is hope for a relatively small number of homeowners with a Countrywide (now Bank of America) pick-a-pay option or subprime loan.  Florida is one of 14 states that reached a settlement with Bank of America earlier this year for $8.6 billion.  The settlement terms require that qualified homeowners whose loans originated between January 1, 2004 and December 31, 2007 receive a principal reduction of up to 95% of the home’s current value.

For homeowners who do not hold such loans, there are still options, including available foreclosure defenses and bankruptcy.  The foreclosure and bankruptcy attorneys at PERENICH The Law Firm have decades of experience representing distressed homeowners and helping them stay in their homes or discharging any deficiency judgment liability to the banks following foreclosure.