Principal reductions have thus far been more of a myth than a reality in the marketplace. The problem is that banks aren’t anxious to forgive debts. As a result the programs that require banks to write down principal like the FHA short refi program have been major flops so far. But Bank of America has recently announced that it will increase the number of loan write-downs it does in certain hard hit states. We get this from a recent HousingWire article:
Bank of America sent letters to Arizona homeowners who may qualify for mortgage assistance, including a principal writedown, under the Treasury Department’s Hardest Hit Fund.
In June 2010, the Obama administration released $1.5 billion in foreclosure prevention funding for states hardest hit by home price declines. BofA said Wednesday the write downs will go to homeowners experiencing financial hardship and owe considerably more on the mortgage than the property is worth.
It is still unclear what would persuade the folks at BofA to write down the principal on a loan. In all likelihood it would require a situation where a borrower is significantly late on payments and on the verge of foreclosing anyway. In such a case the bank may decide that it would be less expensive to write down the principal and keep the occupants in the house than it would be to proceed with a foreclosure, an eviction, and then the process of listing and selling the foreclosed property.
In any case, principal write-downs are still the exception rather than the rule. And they remain entirely at the discretion of the lenders.
However, borrowers who currently have an FHA loan or who have conventional loan backed by Fannie Mae or Freddie Mac still have refinance options even when they owe more than the home is worth. While refinancing doesn’t reduce the principal it can reduce payments. In addition, borrowers control their own destinies with refinances whereas loan modification requests (including requests for principal reductions) leave borrowers at the mercy of the lender.
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April 1st, 2012 at 1:56 pm
I am sure the reason behind this is the changes that MHA implemented allowing from .21 cents on the dollar up to .63 cents on the dollar in which is the new incentive to non-GSE loans. This is is down to a 105% of loan to value.
Fannie and Freddie may be next but until then it is only going to make sense for B of A to take a client down to a 105% LTV. Say a $300,000 loan value at $200,000. They drop the principal down to $210,000 and earn $56,700 from the tax payer. They now have a 105% loan that they can “refinance” over to Fannie Mae and receive a complete $210,000 pay off PLUS the fees and benefits of originating a loan making about $5,000 minimum on offering a 4.75% rate. This then gets sold to Fannie Mae or Freddie Mac and the total loss may only be $38,300 or maybe 12% loss. If they didn’t do this it may have ended in a foreclosure with a net of about $170,000 or a $130,000 loss vs. the $38,300 loss…. make sense? Yes the banks have and will to continue to profit from our tax payers dollars all at a benefit to their bottom line.