What It Is—The lender agrees to reduce the principal amount owed on the loan. With a principal reduction, the lender agrees to forgive a portion of the principal amount owed. In some cases, the lender will agree to forgive the principal amount in excess of the current market value. Up until recently, principle reductions were rarely seen outside of bankruptcy or civil litigation. The HAMP Principal Reduction Alternative (PRA )became effective October 1, 2010.HAMP-PRA
The PRA was designed to help homeowners with underwater homes—by encouraging investors to reduce the amount the homeowner owes on their home.Eligibility for the PRA:
- Homeowner’s mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
- Homeowner owes more than their home is worth.
- Homeowner lives in the distressed property
- Homeowner obtained mortgage on or before January 1, 2009
- Homeowner’s current payment is more than 31% of their gross (pre tax) monthly income. Homeowner owes up to $729,750 on their first mortgage
- Homeowner has a financial hardship and is either delinquent on their mortgage or in imminent danger of falling behind.
- Homeowner has sufficient documented income to support a modified payment.
- Homeowner has not been convicted, within the last 10 years, of the crimes of felony, larceny, theft, fraud or forgery, money laundering or tax evasion in connection with a mortgage or real-estate transaction.
More than 100 HAMP participating servicers participate are required to “evaluate” homeowners for principal reduction; however, they are not required to extend principal reductions.Application of the Principal Reduction Programs
The HAMP PRA has not been as successful as initially hoped—even in California—where most homes are severely underwater. The Making Home Affordable programs were incentive-based programs—not mandatory law against lenders.
Most lenders are very reluctant to reduce mortgages to current values due to their strong belief that home values will inevitably return to post-2006 recession values. For the lender, reducing principal means permanently lost revenue for its investors.
Principal reductions occur with in-house loan modifications than with HAMP-based loan modifications.