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2010-04-14 10:54:01
Principal Writedowns - New Option in Foreclosures

March 26, 2010 by Staff

In a move long sought by critics of the government’s foreclosure prevention program, U.S. Treasury officials today said principal writedowns to 115 percent of loan-to-value will be offered as an alternative mortgage modification.

In addition, the Obama Administration announced a new program to help unemployed homeowners. They will be offered temporary forbearance for a minimum of 3 months, and up to six months for some borrowers.

Monthly mortgage payments will be reduced to no more than 31 percent of their previously documented monthly income. After that period, they will be evaluated for permanent payment reductions.

Nearly 60 percent of those facing foreclosure cite unemployment or loss of income as their hardship.

“These changes will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012,” the Treasury said in a statement.

The new foreclosure prevent enhancements will be funded through a $50 billion allocation for housing programs under the primary bailout vehicle, the Troubled Asset Relief Program, TARP.

Most homeowners deep in negative equity are now eligible for the principal writedown program that will enable them to refinance into affordable Federal Housing Administration loans.

This new option under the government’s Home Affordable Modification Program, HAMP, addresses the insidious problem of “underwater” homeowners who owe more than their homes are worth.

“Homeowners who are significantly underwater and who are eligible for the HAMP program will benefit from changes that will motivate lenders to writedown more principal,” reads a statement by Treasury officials.  “This will help homeowners regain some of the equity lost due to severe home price declines in many regions of the country.”

Mortgage servicers will earn increased incentives for offering principal writedowns in conjunction with a HAMP modification.

Servicers will initially forbear some or all of the principal balance that exceeds 115 percent loan-to-value (LTV) as needed to bring the borrower’s payment to 31 percent of income. Then, this amount will be forgiven in three equal amounts over 3 years, as long as homeowner remains current on payments.

More than 835,000 mortgage modification trials are underway, according to February’s HAMP update. And nearly 200,000 have been permanently reduced.

Those borrowers may be able to take advantage of the new principal writedown option.

“The increased incentives will be available to servicers who elect to review loans that have already been modified under HAMP,” Treasury said.

Click here for an FAQ on the HAMP enhancements.

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