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Principal Reduction down from $130,000 to $49,000!

imagesCACZWJSW.jpgElusive principal reductions are hard to come by, but we recently scored a very big win on behalf of one of our prior foreclosure clients turned Chapter 13 client. This week Ocwen agreed to a reduction in principal from $130,000 to $49,000 at 2.625% interest. This family’s principal and interest payment dropped to $224. Escrow is anticipated at another $200 for taxes and insurance.

This Bartow, Polk County, Florida family had lost their employment in 2008. By the time they obtained new employment nearly two years had passed and a foreclosure lawsuit was filed by MERS as nominee for Home 123 Corporation in 2008. A HAMP mod was denied during the foreclosure process. Prior to a foreclosure judgment being entered, the family filed a Chapter 13 in a final effort to keep their home. One of the problems was that the arrearage was $31,000 all of which had to be paid in the five year Chapter 13 plan. Moreover the home was valued now at $50,000 per the most recent tax assessment while $130,000 was owed on the home on a first mortgage. In bankruptcy, we as debtor’s counsel filed an objection to the Proof of Claim on the basis that proper documentation was not filed. Missing endorsements demonstrated a lack of standing on behalf of the mortgage company, among other problems.

A couple weeks before trial, we arranged a conciliation conference with opposing counsel and their client. Our clients were again considered for a HAMP modification which was denied a second time. We offered a new amortizing mortgage of $50,000 at 30 years at 5% interest. Ocwen came forward with an independent modification of something even better: $49,000 at 2.625 %. Payment $224 plus escrow. Hard to beat. Clients jumped at the offer needless to say.

To give credit where credit is due, I have no idea how much of this was because of Ocwen or because of our stellar legal wrangling 🙂 I have heard of Ocwen reducing principal elsewhere in the nation, but have seen no reports locally. In an article in a site for those in the mortgage default servicing industry, Ocwen has explained in their experience negative equity increases the likelihood of a re-default 1.5 to 2 times and that approximately 15 percent of all Ocwen loan modification involve some element of principal reduction.

Ocwen states that it benefits in the long run because successful and sustainable modifications result in more cash flow for investors than they would get from a foreclosure. In the instant case, it is likely the foreclosure sale would have brought only $20,000 – $30,000 tops as a distressed sale. Housing Wire also reports this year that both Ocwen and GMAC, the servicing arm of Ally Financial, are aggressive in principal writedowns and that it is not seen industry wide.

Ocwen’s president Ronald Faris has proposed enhancements to HAMP to allow for principal writedowns, elimination of the debt-to-income ratio (DTI) and requiring underperforming servicers to outsource their HAMP processes. Who among us wouldn’t agree that Bank of America shouldn’t outsource their mortgage servicing? How many lawsuits and customer complaints must BofA face for inept mortgage servicing before something changes?

In my view, both sides get a pat on the back here for helping a family keep their home with a mortgage modifcation that makes good business sense for both sides.

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