Lori writes in:

 

Richard,

When do you think the banks/servicers will start to reduce the principle

balances on mortgages?

The Real Estate market is only getting worse, and it seems it would

behoove everyone involved if they (the lenders) would start reducing

mortgage balances, instead of foreclosure.

 Good question, Lori.

A mortgage principal reduction or mortgage loan reduction happens when a lender says "you can stay in your house. Your mortgage balance will be cut from $300,000 to $200,000."

I have heard of some principal reductions being done. In one case, several thousand were done by one loan servicer in particular.

I don't know why they were done.

But I expect them to become more common eventually.

Just not yet.

Why? Because lenders are not the people you and I deal with on our mortgage. Those as you know are servicers of mortgage loans. The loans have been originated and sold off to large trusts that each hold hundreds of millions of dollars worth of mortgages.

These trusts are the noteholders and they make the decisions for what happens to a mortgage that is in their portfolio.

So you have the servicers of the loans who are collecting fees for servicing the loan. And the noteholders who may be in the UK, or in the Middle East, or Wall Street.

It is a situation that results in very slow progress in mortgage short sales, very slow progress in loan modifications, very slow progress in adjusting in any direction.

We are seeing short sales take 3 or 4 months, sometimes longer. A short sale can be done even if you are on time with your payments. A loan modification usually requires you to be late with payments. From what I've heard, a principal reduction has only been available for people who didn't pay their mortgage. I don't know the other ingredients to a successful principal reduction and I doubt anyone does.

So should you wait for your loan balance to be adjusted? I wouldn't hold my breath.

How to tell if you qualify for a loan modification

I speak to a lot of folks who have put off the inevitable. Today I spoke to someone paying $4000 per month in mortgage payments and their income is maybe $6000 or $7000 per month at best. That is too much of a payment. They may get that payment modified by the lender but to do so, they must meet the test:

Add up all your monthly debt payments. Minimum payments on credit cards, car payments, that type of thing. Don't include things like utility bills or medical bills.

Add up the mortgage payment you are hoping the loan company can adjust down to. If you owe $600,000, they aren't going to give you a loan of $2000 per month. A good rule today would be figure on a 6% fully amortizing 30 year mortgage payment on your balance as the loan payment you could achieve.

Add up insurance and taxes as a monthly payment.

If the total is 50% of your gross income, or less, you may be eligible for a loan modification. If the total is greater than 50%, then you won't be eligible for one.

Remember, I am just some Guy on the Internet. Don't listen to me and don't depend upon what I say. I wish you luck and I'll talk soon.

Turn tragedy into opportunity. Learn how to do loan modifications for your clients and for yourself.

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