Why Would The Mortgage Company Not Lower Our Principal?

by Angelique
(Channahon, Illinois)

To make a long story short, we closed on the purchase of our new home in April 2006, one week later I was diagnosed with a condition that resulted in almost six months in the hospital having four brain surgeries, a few spinal taps and some other procedures. Needless to say, this unexpected medical expense and loss of employment resulted in us first filing for bankruptcy, which we did SOLELY to be able to keep up with our mortgage payments, and eventually ended up with us in foreclosure.

In addition to the unexpected medical issues, our county raised our property taxes three times in three years, and because our mortgage company required that we pay our property taxes through them, our mortgage payment skyrocketed:

• Our 1st mortgage payment, due 5/1/06 was $1459.54 (Loan terms 30 yr Conv @ 6.625%)


• By 12/06 our monthly mortgage payment had jumped to $1718.61 with the property taxes being $1266.60/yr.


• By 12/07 our monthly mortgage payment jumped to $2207.91 and the property taxes to $3995.22/yr.


• By 12/08 the mortgage payment had jumped to $2413.47 and the property taxes were now $6272.10/yr.

Apparently, counties in Illinois (I'm not sure if it's the same everywhere) are able to base the current property taxes on what our home's value was three years prior -- at the peak of the real estate market/boom!

What is especially disturbing is that our purchase price for this home, only four years ago, was $227,943.00, and today there are three of the SAME EXACT model homes as ours, same number of rooms, square footage, etc. listed for sale in our town with asking prices between $167,000. and $169,900. Our home has dropped at least $61,000 in value in only four years!

When I contacted our mortgage company to see about loan modification, etc., they refused to listen that our income THIS year is only a little over a half of what it was the year prior, and they insisted on basing what we could afford in a loan modification now on what our income was the previous year.

So, time passes, our home goes up for sheriff sale auction four times over two months with no bidders/buyers. (Why would anyone pay their starting bid of $221,532. for this house when they can purchase the same house MUCH cheaper??) and today, when I look at the foreclosure website, I see that our home was sold to the plaintiff, our mortgage company, for $155,879!

If they would of worked with us, and lowered the principle of our loan to reflect current home values in our area (like I begged them to do), we would of been able to make those mortgage payments, but they refused to do that as well.

So, my question is, WHY would they purchase our home in auction, for $155,879. and most likely be stuck with it indefinitely, as not one home has been sold in my area since September of 2009, instead of just lowering the principle for us, to the current value, and not only would they of been receiving payments on it, but they wouldn't of been stuck with YET ANOTHER empty, foreclosed home?? How does this make any sense?

Mortgage Loan Modification Answer:

by Loan Modification Expert - Dan North

You are right it does not make financial sense. This kind of situation is what is causing the Mortgage Crisis to continue. There is only one word for something like this "STUPID".

First off why would Illinois keep law's on the books that force homeowners into foreclosure. This is a law that needs changing. It may have benefited homeowners when housing prices continued to go up but not when prices are crashing.

Next why haven't the foreclosure law's in Illinois be changed to give Judges the option to require modification and principal reductions (principal forbearance at least) as a step in the foreclosure process and at least give the homeowner a chance to keep their home.

OK maybe expecting common sense from a Politician is too much to expect.

So Why Do Lenders Make Obviously Stupid Decisions?

So now, why would a financial institution make a decision that will hurt them financially? Well they suffer from wrong think and banks are very notoriously slow to change how they operate. It is much better to make an obviously wrong decision than to consider changing how things have been done. I mean, that is the way it has always been done and has stood the test of time. If that was the wrong way to do things they would have gone out of business long ago, never mind that they are quickly going out of business now.

To be fair and give the lender some benefit of a doubt, to some extent they are bound by legal contracts that are in place that dictate how certain situations are dealt with. This could be a situation where an investor refused to listen to reason and would not authorize any change that might protect his financial investment in your mortgage.

This is usually a situation of "Do not confuse me with the facts, just pay me the money you owe me or I will take your house from you." Not very enlightened or intelligent but the investor is the ultimate decision maker on any modification of your mortgage. This is equally true for private individual investors as well as institutional investors or mortgage companies.

What Happens After Foreclosure?

Unfortunately Illinois has no Right of Redemption after foreclosure. (see Illinois Foreclosure Law) This means that there are no options available to get your home back at this point except make an offer to buy it from the Mortgage Company at a reduced price. They may take anywhere from 60 to 80% of the fair market value and now also be able to accept the offer. Yah, I know, Bureaucracy and Stupidity often go hand in hand.

That would be one way to get your principal reduction.

Deficiency Judgments are allowed in Illinois so your lender could come after you for the full amount of money they could not recover from the foreclosure sale.

If they do not they will report it to the IRS as income from debt forgiveness. The amount of debt forgiven must be reported on IRS Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness this form must be attached to your tax return.

Fortunately the IRS does have provisions in place that exclude this income from income tax. You may have grounds for exclusion of income realized as a result of debt forgiveness due to foreclosure on your principal residence and should consult IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments.

Here is a short list of links for further information:

• Ten Facts about Mortgage Debt Forgiveness


• IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments


• The Mortgage Forgiveness Debt Relief Act and Debt Cancellation


• IRS Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness


• Illinois Foreclosure Law

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