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.
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