People ask all the time why banks aren’t more willing to work with homeowners who are underwater? Why not modify or bring down the loan to the current market value instead of foreclosing? Why are other homeowners given no other option than a short sale?
These are all very good questions. Thousands and thousands of homeowners are drastically upside down in their homes, many up to 70% upside down. Almost everywhere you turn, you can find homeowners in cities like Las Vegas and Phoenix who owe $100,000 - $200,000 more on their home than it’s currently worth. These homeowners are looking at it taking 20 years and maybe more, just to get to a breakeven point. Many want to stay in their homes, but feel that logically, it just doesn’t make sense. Added frustration sets in when they contact their bank in hopes of working out a reduction in the balance, only to get turned away.
Bank of America is one such bank. Las Vegas real estate attorney Michael Later says "the bank has taken a hard line in not being willing to reduce the principle balance on a loan." Why? For one, if the loan is government backed, the bank gets paid, even if they end up approving a short sale or foreclosing on the property. In addition, there’s PMI (Private Mortgage Insurance) which helps to cover the bank’s loss. Often, the bank has taken out insurance on the home, even without the homeowner’s knowledge!
There’s another reason banks aren’t working with homeowners in reducing the principle balance. If the bank approved a reduction for homeowners in Las Vegas who are, for example, 50% upside down, then Later says it could set a precedent. A homeowner in Ohio who’s only 25% upside down and looking at a much shorter recovery period would expect the same treatment from the bank. It’s a path the bank does not even want to start walking down.
So for now, few options remain for underwater homeowners. They are stay in the home, short sale, foreclose or attempt a deed in lieu of foreclosure or a loan modification.
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