Mortgage Debt Settlement: Is it Possible?

Mortgage debt settlement is possible although it is more difficult than settling unsecured debt like credit cards.  While lenders are still reluctant to reduce principal, the government has put more pressure on lenders to find ways to help borrowers who are underwater and cannot afford their mortgage payments.  Lenders would rather work out mortgage debt settlement than risk getting nothing if you file for bankruptcy.  A debt settlement attorney can assist you with negotiating mortgage debt reduction with your lender.    

Debt Settlement Options 

Mortgage modification is a way to reduce your mortgage debt. There are various types of modifications. Typically, your lender agrees to modify your existing mortgage by: 

  • Lowering your interest rate
  • Extending  your loan term
  • Forgiving arrearages or tacking them to the back end of your loan
  • Reducing principal   

Getting the lender to reduce the principal is where the skills of your debt settlement attorney are useful. The attorney is an expert at mortgage and debt laws and negotiating modifications and can use those skills to negotiate the best terms for your modification.  A debt settlement attorney can also negotiate with your lender to remove any negative credit reporting on your credit report as part of the settlement.  If you can afford to pay your mortgage off with a lump sum cash amount, your attorney may be able to negotiate a principal reduction and ask your lender to report the debt paid in full.  Be sure you get everything in writing from your lender, and check your credit report to verify they reported what they agreed to. 

Government HAMP- PRA Program

Under the government Principal Reduction Alternative Program (PRA) guidelines, homeowners who are upside down on their mortgages and who have been approved for a trial modification or a permanent modification prior to June 3, 2010, under the HAMP program, may be offered principal reduction if they meet all the guidelines under the PRA program. The PRA will be available over a three year period and treated as principal reduction forbearance first.  Each year on the anniversary of the borrower’s trial period, the principal will be reduced 1/3 of the forbearance amount if the borrower is in good standing.  Lenders or loan servicers participating in the Second Lien Mortgage Program (2MP) must also agree to reduce the principal on the second mortgage in proportion to principal reduction on the first mortgage.  There will be investor incentives as well.  More information will be forthcoming regarding investor incentives.  The guidelines for the PRA program go into effect October 1, 2010, although loan servicers and lenders may implement them sooner.    

Hire an Attorney

Since mortgage debt settlement is complex and lenders are difficult to deal with, it is recommended that you hire a debt settlement attorney to help you with the negotiations.  The attorney is knowledgeable about mortgage and debt laws and can explain your options and answer your questions.   

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