Sunday, October 17, 2010

Loan Modifications / Principal Reductions, a Farce

Phoenix Business Journal, Oct. 15, 2010

"Arizona Wholesale Mortgage charges $3,000 for loan modification work. If it is unsuccessful, all but $600 is refunded. [The company's owner] said consumers should be leery of modification firms promising principal reductions. He said the more likely scenario is for banks to temporarily lower interest rates to as low as 2 percent and then gradually bring them back up each year until they reach 5 percent. That practice is occurring under federal mortgage assistance programs...

"'Interest rate adjustments are really all I've seen, but these are tantamount to principal reductions if the homeowner ends up staying in the home long enough,' said Robert Nagle, a real estate attorney...'By this I mean when we borrow $100,000 to buy a house, we end up paying back, say $300,000, when you add in the $200,000 of interest. If you reduce the interest rate early enough in the term, as we are presently seeing, then perhaps the total paid drops to $250,000. So, in essence, the homeowner `repays' $50,000 less...

"The Arizona Department of Housing last month started a program with a $125 million grant from the Obama administration to curtail foreclosures in the state. The program could lower principal by as much as $100,000 for underwater borrowers at least two months behind in payments. But the principal reductions hinge on banks going along with the plan and matching a $50,000 principal payment by the state.

"Real estate pros aren't optimistic.

"'I have never seen a principal reduction, just `trial periods' that drag on and on... Seems like most of these banks know they are going to get the house back sooner or later, so they have made up these trial periods as a method to get some additional money to come in on the property before it is ultimately short sold or foreclosed on,' said Joseph Maggiore, a Realtor with Realty Executives in Scottsdale.

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