Looking for the Highly Sought After Principal Reduction-BEWARE
One of the most common questions I receive from clients is whether they can get a principal reduction on their loan. A great deal is written about principal reductions, and the media spends a lot of time highlighting the fact that principal reductions are part of the Foreclosure Fraud Settlement of 2012. With all this attention, there is a common misperception that principal reductions are handed out regularly. In reality, however, principal reductions are harder to come by than people think.
To test my theory, I polled 5 attorneys that I know who practice in the area of foreclosure defense. Of the 5 attorneys polled, there were a combined 10 principal reductions achieved over the last 3-4 years. The 2 principal reductions that I have seen in practice have come as a result of the lender hand picking the borrower for a principal reduction. While I cannot prove it for a fact, I have a sneaking suspicion that the banks hand pick loans that they originate, and still own, and then offer to reduce those principals to obtain a credit against the amounts owed in the Foreclosure Fraud Settlement of 2012. A few of the other attorneys I spoke to said they have also seen principal reductions in cases where the banks either cannot locate the original note and mortgage, or fear that there is some fraud involved in the foreclosure case.
On the other hand, the far more common form of principal loan reduction comes in the form of a “charge off” on a second mortgage. In these instances the holder of a second mortgage essentially waives their lien right on the property. This appears to be consistent with the national practice, as multiple Homeowner Advocacy Groups have reported that the vast majority of principal reductions are granted on second mortgages instead of first mortgages. When you think about this, it makes sense because the likelihood of recovering anything from a second mortgage in this real estate market is slim. Lenders holding a second mortgage would rather write the loan off as bad debt than spend money pursuing the borrower for sums they likely will never recover.
Given these facts, it is troubling for me to hear clients say that they have been promised a principal reduction by other attorneys. Typically these promised reductions come in the form of an upfront flat fee with a vague promise to secure a principal reduction somewhere down the road. Unfortunately for many, the reduction is never achieved, and the Borrower is ultimately advised that they did not qualify for a reduction and now are forced to pursue alternative loss mitigation options. While this is the most common form of a promised principal reduction, there are other methods out there. I recently saw an article where a company is purchasing non-performing loans from lenders on behalf of the Borrower at a discount, and then turning around and selling the loan back to the Borrower for the discounted rate, plus fees. While this practice may sound like a good option to a borrower, there are real concerns associated with this scenario.
The first red flag that I see with this arrangement is that most lenders require such transactions to be “arm-length” in nature. When a lender agrees to accept less than what is owed on a note they do not want the party that is “breaching the contract” to benefit. The arm length affidavits generally require that there are not any hidden agreements between the purchaser of the loan and a third party that will allow the Borrower to benefit from the transaction. Furthermore, what happens to the Borrower when they can’t make their payments to the new loan holder and are forced to default? Is the property foreclosed? Even worse, if the Borrower subsequently defaults, have they been forced to waive their defenses to a foreclosure and/or garnishment action as a condition of the company purchasing their loan for them at a discounted rate? As you can see, these arrangements can have dire effects for a borrower.
Accordingly, consumers should be extremely cautious when dealing with any person promising them an instant solution to their distressed property. In today’s world there are hidden traps everywhere. However, there are a plethora of options available to struggling homeowners including federally regulated programs that should be pursued before seeking extreme options. Additionally, if you are lured into one of these principal reduction promises, you should ask to see what disclosures are being made to the lender, and what conditions are required of you as the Borrower before you authorize a third party to purchase the note on your behalf. Do not be fooled into waiving any rights without first speaking to an experienced attorney. If something sounds too good to be true, it generally is. If you have questions or concerns about an arrangement such as this, contact us today for a free consultation.
******Please be advised that this article does not constitute legal advice nor does it provide any basis to form an attorney-client relationship. Nothing in this article should be copied without the express permission of the author.