Lenders are employing a mixed bag strategy to recover money on bad home loans. Interestingly, the mortgage servicers are the ones showing way to even large lenders on how to settle loans of distressed borrowers. Besides the traditional mortgage modification methods, principal reductions and short sales are some of the other commonly adopted settlement strategies currently.
Who are mortgage servicers?
Mortgage servicers are firms in charge of managing loan accounts for large lenders. They collect monthly payments and confront delinquent borrowers for their dues. They also handle escrow accounts and can begin foreclosure in case of defaults. An escrow account is a trust account used to pay property taxes and insurance premiums.
Post the credit crisis, there has been a phenomenal rise in non-performing loans. Several specialty servicers have come up to deal with this new situation. Federal Deposit Insurance Corp.’s $500 million sale of non-performing loans to servicer RoundPoint is a recent example of how organizations are preferring to sell loans to firms that can better deal with defaulters.
Principal – Loan Balance Reduction
Servicers and lenders often use principal or loan balance reduction strategy to ensure that people are able to afford their loans. Principal forgiveness gives customers relief in the form of reduced principal payments. This in many cases means that the borrowers will not have to pay more than the value of their home.
The Bank of America has recently launched their principal reduction plan as part of the National Homeownership Retention Program. Borrowers who are late with payments by 60 days or more can gain relief from the principal forgiveness instead of reduced interest rates. This program is expected to go a long way in helping people who risk losing their homes to foreclosure.
If you get lucky, you can also win yourself a mortgage modification lottery. Your servicer can slice down the total balance of your mortgage by almost 40%. Of course, you will have to be responsive to call campaigns and compare the options offered by different servicers to find out what’s possible in your case.
However, borrowers are wary of frauds and sometimes, choose not to take advantage of great schemes fearing hidden fees.
In the event that the borrower is unable to make the least payments, foreclosure is initiated. Specialty servicers often use short sale programs to assist borrowers to payback.