Foreclosure Walk-Aways: A Better Alternative to Mortgage Relief?

Foreclosures
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Frustrated by a lack of principal forbearance in the government’s mortgage modification program and the prospect of ‘drowning’ in underwater equity for years, some homeowners are opting to walk away – instead of going with a foreclosure rescue.
A major newspaper in South Florida – one of the nation’s epicenters for the foreclosure crisis – is reporting this trend in the wake of the U.S. Treasury’s update last week on its Home Affordable Modification Program, or HAMP.
Treasury officials touted increasing numbers of mortgage relief trails and permanent modifications in its latest report – but the percentage of those getting substantial assistance is falling short.
HAMP’s growing challenge is effectively saving borrowers in South Florida and elsewhere who purchased homes at over-inflated prices – and may not even be considered for principal reductions.
The primary number reported by the Treasury: 112,521 modifications made permanent or pending such status through December.
But only 17,280, or 26 percent, of permanent modifications approved and completed nationwide included either a reduction in principal or a temporary reduction that is re-administered to principal at the loan term’s end.
Overall, only 25 percent of eligible homeowners – those 60 days late on their mortgages – are even qualifying for mortgage modification trials – the initial phase before consideration for permanent status, the Treasury report shows.
California and Florida, with 172,288 and 105,108 modification trials, respectively, are the busiest states by far in the HAMP program. In third place is Illinois with 44,942 trials through December.
“What motivation is there for a homeowner to pay a mortgage that is three times more than the property is worth?” said real estate attorney Rashmi Airan-Pace in an interview with the Palm Beach Post.
Airan-Pace’s Miami firm, Airan2, Airan-Pace and Crosa, specializes in foreclosure defense.
Airan-Pace told the Post that he recently secured a modification for a Miami Beach client that reduced his monthly payment from $3,700 to $1,600. But he said it was only a reduction in interest rate — allowed by HAMP to be as low as 2 percent.
His client would not sign the paperwork, Airan-Pace recalled. He owed $470,000 on a property worth less than half that, the attorney said.
Lenders will not likely agree to a reduction in principal on loans made on overpriced homes, and that’s a growing problem for HAMP administrators, mortgage industry experts say. The $75 billion program to rescue homeowners from foreclosure is doomed to fail, in large part, to the program’s lack of addressing the issue of underwater mortgages, or homeowners who owe more than the sum of loans against their property.
In South Florida – Palm Beach, Broward and Miami-Dade counties – about  46 percent of mortgages are upside down, according to third-quarter 2009 data from Zillow.com.
Airan-Pace said he expects more homeowners will abandon or avoid modification plans that don’t reduce principals.
“Many homeowners feel that if they take a modification now, a decade down the road, they’ll still be coming to the closing table with money,” Airan-Pace told the Post.

9 thoughts on “Foreclosure Walk-Aways: A Better Alternative to Mortgage Relief?

  • January 18, 2010 at 11:42 pm
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    Borrowers need not turn up their noses at interest rate reduction mods. I got one on a lot loan, taking it down from 8% to 2%, only because I had a medical emergency and lost a lot of income. Yes, I’m $150,000 underwater on it but will save over $100,000 with the new rate. It doesn’t seem right to make a lender pay for a poor investment decision unless we’re going to give them part of the profits when we make money on our real estate. That’s kind of like the lenders being happy to profit from risky lending but wanting to stick the taxpayers with the results when they lose money. There seems nothing in the reforms designed to force accountability. Too bad.

  • January 19, 2010 at 10:19 am
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    Gina, the problem is that many homeowner are in a position where they cannot ‘make money on our real estate’ as you put it. The lenders made out like fat cats during the height of the housing bubble along with the agents. It doesn’t make sense for homeowners to be the only one’s paying for the problem either. I’m glad your loan mod worked for you but in many cases it does not. The problem now for both homeowner and lender is that a home used to be secured by value. If a home needed to go into foreclosure, it was worth something. Now, that is not the case in many homes and while the lenders are losing $$$’s, so are homeowners.
    There are programs like American Homeowner Preservation that work to address both problems (on the lender and homeowner side). My hat is off to American Homeowner Preservation – at least they are taking a novel approach. Walking away from mortgages won’t solve the problem any quicker than granting those mortgages.

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  • January 19, 2010 at 2:31 pm
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    So let me get this right, the home owner who agreed to the terms of the loan, knew the payments and lied about their income should be able to spread the loss to tax payers that have nothing to gain and everything to lose. The scum bags that signed for the loan deserve to lose the house and should NEVER have the opportunity to get credit again. In addition, the balance not covered by the sale of the home should remain with the borrower and they should be charged 25% of their earnings for the remainder of their life and their and passed down to children and family until paid off.
    In no way should this bad debt be passed to responsible tax payers. This, along with the current administration will be the downfall of what used to be the greatest country on Earth. This liberal socialism is killing this country.
    Sucking up to the banks that gave the loans as political payback shows how crooked democrats are.

  • January 20, 2010 at 12:06 am
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    Knuckle…you’re a knucklehead. When large corporations and banks refuse to pay their debt, it’s called strategic default…and it happens all the time, but nobody talks or takes offense. People are laid off, 100s at a time, and no one takes exception. If a homeowner walks away and sticks it to a bank that trumped up appraisals, issued “liar loans” knowing they were a lie, the banks deserve people to walk away.

  • January 20, 2010 at 9:25 am
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    Principal reduction is the key to stemming the foreclosure tidal wave. The problem is that lenders and servicer will never agree to permanent reductions. I would guess that out of the thousands of principal reductions approved less than a 100 would be permanent.That takes away all incentives to the borrower. Even with the best of intentions, if the borrower knows that even if they paid as agreed for the next 20 years they will still be upside down and facing a short sale, they will walk away.
    The real scandal that no one is talking about is the FDIC paying the Mega Banks huge profits to foreclose on American homeowners. I did a article on my site that tells that sad story. Given a choice of approving a loan mod and suffering a loss or foreclosing and making a profit, doesn’t take a genius to figure what the Mega Banks will do. God save us all.

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  • March 1, 2010 at 4:04 pm
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    The problem with principal reduction is that if you give one person one, everyone with any financial sense else will dump their loans unless they get one. If your neighbors get reductions and you don’t, you’re the one holding the bag and ending up the big loser (you and all tax payers). Reductions should only be allowed to the truly needy as part of a bankruptcy proceeding. And lenders should do the responsible thing and force walkaway borrowers to pay off deficiency judgments. Politicians should dump non-recourse laws — it’s been proven that they cause more foreclosures and more havoc in real estate markets.

  • July 30, 2010 at 4:53 pm
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    we did the gove bailout. they took our money and we never heard from them again

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