Steve's Blog for Upside Down Owners

Since 2008, Steve has been publishing a Blog exclusively for upside down property owners and their agents with news and updates affecting their lives. View Steve's current posting at www.stevebeede.com.

Steve's current posting as of 10/20/10 is:

HAMP PRINCIPAL REDUCTION PROGRAM TAKES EFFECT

On October 1st, a new "Principal Reduction Alternative" (PRA) was added to the Home Affordable Modification Program (HAMP) which provides government incentives for lenders to reduce principal balances on loans as part of a modification.  To qualify for HAMP, a borrower must be spending more than 31% of their income to pay their debt. Previously, the program was designed to reduce this debt to income ratio to no more than 31%,  first, through an interest rate reduction; and then through a lengthening of the payback time on the loan, typically to 40 years.  If this didn't do it, the borrower was typically rejected for the modification unless a lender was willing to make some other loan payment adjustment but generally this didn't include principal reduction on the amount owed. The result was that only 4.5% of loans actually got modified under HAMP and for those that were modified, 60% later failed because either the property wasn't worth the debt or the borrower had other financial difficulties. The new PRA was designed to improve this dismal result.

Under the new HAMP Guidelines creating PRA (Supplemental Directive 10-05), servicers are required to evaluate all HAMP-eligible loans where the loan balance is greater than 115% of the property's fair market value to determine if a principal reduction is beneficial. If so, the servicers are encouraged to offer the principal reduction to the borrower although they are not required to do so. The reduction?is "earned" over a three-year period and is initially treated as a PRA Forbearance. Each year (for three years) that the borrower is in good standing on their loan payments, one-third of the original PRA forbearance amount will be reduced. This reduced amount will be applied to their unpaid principal balance and, at the end of the three year period, the loan would only be 115% of the fair market value at the start.

To participate in PRA, borrowers must still meet HAMP's basic requirements: 1) personal residence; 2) debt to income ration greater than 31%; 3) loan balance of $729,750 or less; 4) Mortgage originated prior to Jan 1, 2009; and 5) be facing a financial hardship. Further, PRA will not work with all loans. Loans made by Government Sponsored Enterprises (GSEs), ie: Fannie Mae and Freddie Mac, will not qualify.

The question now is whether this new Program will have any real effect or will it just be a lot of hype with little actual help for homeowners.  Amazingly enough, the first lender to announce participation was OneWest, the lender created to purchase the failed IndyMac from FDIC. As readers of this Blog are aware, the sweetheart deal which OneWest received from FDIC in the purchase appears to have provided a greater incentive for OneWest for foreclose instead of modifying or even cooperating with a short sale. However, as reported by Carrie Bay at www.DSNews.com, this adoption may signal a new direction for OneWest.  BofA and Wells Fargo have announced similar programs of their own although we've seen few actual principal reductions actually go into effect so far.

If you believe that you would qualify for the HAMP Principal Reduction Alternative, contact your lender right away. With the current uproar over defective foreclosures, lenders may be looking for avenues to increase their public image. The PRA may be just the ticket to benefit both borrowers and lenders. For more information, contact the HAMP Solution Center at support@hmpadmin.com or 1-866-939-4469.