Does anybody know someone who got a principal reduction? From HW:
A borrower is more likely to get a principal reduction than a short sale or deed-in-lieu of foreclosure under the Home Affordable Modification Program.
The Home Affordable Foreclosure Alternatives program launched in April 2010 to give borrowers who are eligible for HAMP a chance at a short sale or DIL. Participating servicers completed about 20,700 of these deals as of October, with less than 600 of them deeds-in-lieu, according to Treasury Department data.
The principal reduction alternative, or PRA, began in October 2010 and only for mortgages not guaranteed by Fannie Mae or Freddie Mac. But in six fewer months, servicers started 33,376 modifications by writing down principal.
The effect of the reduction is eye catching. The Treasury released characteristics of HAMP modifications last week. The median loan-to-value ratio on modifications that went through principal reduction was 158%. After the workout was complete, the borrower held an LTV of 115%, meaning he or she owed 15% more on the mortgage than the home was worth rather than being 58% underwater.
The average amount reduced is more than $65,000 or 31% of the unpaid principal balance.
Through PRA, the Treasury pays investors for every dollar of principal forgiven on a sliding scale depending on how far underwater the borrower is.
HAMP enters its final year next month, and it has been criticized at nearly every turn since it launched in March 2009. It will not reach the 3 million to 4 million originally predicted. After redefaults are factored in, roughly 800,000 homeowners will avoid foreclosure thanks to HAMP, according to the Congressional Oversight Panel.
The Treasury did not release estimates for HAFA or the PRA programs when these launched. But to have principal reductions, which has been long thought of as the spark for anyone considering strategic default, outpace short sales highlights how convoluted and fraudulent the process remains. Especially when banks experience a loss rate of 60% on short sales compared to 70% on the lengthy foreclosure and REO process, according to Moody’s Investors Service.
Bren Sheriff, a co-owner of AMAXX Title Services, a boutique title firm for inner city Chicago, said the problem is that many buyers in short sales can’t take the wait.
“It has taken so long for some of the short sales to get completed, investors have lost their end buyers – thus no deal,” she said.
It isn’t just the public short sale program struggling but private ones as well. The top 10 servicers gave short sales or DILs to roughly 35,500 borrowers canceled out of HAMP trials through September. The nearly 92,000 foreclosure starts on this group of borrowers was nearly triple that amount.
In January, the Treasury attempted to relax certain HAFA guidelines such as no longer requiring a servicer to verify a borrower’s financial information or to determine if the monthly mortgage payment exceeds 31% of his or her income. At the time, HAFA had totaled roughly 660 short sales and has since added 20,000.
Christopher Hanson, who works on short sales at the Hanson Law Firm, said because of the various qualifiers borrowers had to reach, HAFA was doomed from the beginning.
“The loss sharing agreement (under the principal reduction program) criteria are more realistic than the borrower eligibility under HAFA – at least that’s what I’d suspect,” Hanson said.