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March 25, 2009 > Options to avoid 'mortgage meltdown'

Options to avoid 'mortgage meltdown'

Submitted By John N. Kitta

One would think that, after all the bailout money provided to financial institutions, homeowners facing mortgage defaults would see some relief.

The biggest obstacle to reducing loan balances has been a lack of financial incentives specifically requiring lenders to do so. More than a month after President Obama presented his Mortgage Rescue Plan, guidelines for reducing balances remain unclear. In fact, the only reference providing for it was through bankruptcy.

Where does this leave the homeowner who is still in distress, who owes more than the home is worth, and who does not wish to file for bankruptcy?

Loan modification is a good option for many and, according to Obama's plan, lenders could be more agreeable to reducing payments and/or restructuring loan terms. Modifying loans to a 4 percent fixed rate for 30 or 40 years and, in some cases, reducing principal are not uncommon in today's market.=

While the information below is directed to owner-occupied properties, there may be relief for other individuals as well. To get negotiations off on the right foot, use the most effective weaponry available.

Qualified written request
When you first contact the lender with your proposition, send a qualified written request. There is no cost for this procedure, and the law is particularly supportive for those not yet in default.

Properly worded, this letter will put the lender on legal notice that you are filing a qualified written request. They have 20 business days to acknowledge receipt and 60 business days to respond by sharing requested information, making modifications, or explaining why the proposal is not acceptable.

Loan modification
In the interest of all parties, California law says lenders are obligated to agree to a modification or work-out plan, if a) it can be reasonably accomplished, and b) it nets the lender more money than they would get from foreclosing. It provides a realistic basis to renegotiate a loan price at, or even below, fair market value. This is based on the fact that foreclosures incur marketing expenses, carrying costs, commissions and other fees, as well as the possibility the property could sell for less than fair market value.

This certainly opens the door for a lot of dialogue.

Qualified written response procedures and the loan modification statute can assist property owners in distress. They can be excellent tools that provide useful horsepower, whether or not the matter ends in litigation.

John N. Kitta has been a California Real Estate attorney for 32 years. He can be contacted at

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