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Can you get your mortgage reduced? What you should know | UTSanDiego.com

Can you get your mortgage reduced? What you should know
By Lily Leung Saturday, June 30, 2012

About a year ago, then-schoolteacher Donna Marvel saw friend after friend get pink slips from the San Diego Unified School District. The grueling experience and the specter of more layoffs led her to take a $20,000 pay cut for what seemed like more-stable work at an online school. The career change meant the 54-year-old City Heights homeowner was coming up short by $300 a month on an underwater mortgage, even after taking on part-time gigs and tapping her retirement savings. To Marvels relief, help arrived when her lender agreed to permanently forgive part of her mortgage principal a move not often seen but one that might become more common in the coming years to keep underwater borrowers in their homes. Related: Should banks reduce mortgage principal? I can make it now, said Marvel, whose payments were reduced from $1,800 to $1,478 a month through the states mortgage-aid program, Keep Your Home California. I think I wouldve lost my home without it, she added. And the lender wouldve lost money. Principal forgiveness, once a 10-foot-pole kind of topic, is not only discussed more by lenders, its also increasingly being perceived as good business for folks with a stake in home loans. In its ideal use, this type of loan workout keeps underwater borrowers like Marvel in their homes, while investors and banks continue getting paid. Opponents say these selective deals may lead to moral hazard, a buzz term that means borrowers take risky moves in hopes that theyll get bailed out. Either way, several signs point to the increased use of mortgage write-offs. The U.S. government reported last week that loan servicers included principal reductions in more than 10 percent of loan modifications during the first three months of www.utsandiego.com/news/2012/jun/30/principal-reductions-san-diego/#

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loan servicers included principal reductions in more than 10 percent of loan modifications during the first three months of the year. Thats up from 3 percent in the same time period last year. The write-downs are expected to climb, in light of this years 49-state settlement with the major banks. As part of the deal, lenders must reduce the principal balances or perform short sales for about 250,000 underwater Californians, to the tune of $12 billion. Bank of America, for one, has begun sending about 10,000 letters a week for the past six weeks in its attempt to get borrowers to apply for its in-house mortgage-forgiveness program. Many lenders are expected to send out their solicitations during the third quarter.

Can you get your mortgage reduced? What you should know | UTSanDiego.com

How do principal reductions work?

A principal reduction occurs when a lender cuts the amount that a borrower owes on a home to something more affordable. Whats reduced is essentially forgiven by the lender. For example, borrower John Doe owes $100,000 to Bank ABC. Doe, who is going through a financial hardship, cannot pay his current monthly mortgage amount and is approved for a principal reduction by his lender. The lender determines that reducing the loan balance by $20,000 would make Does payments more affordable, so $20,000 of the total mortgage amount is written off, or forgiven. The new loan is for $80,000, and the monthly payments are adjusted accordingly. In the state mortgage-aid program, Keep Your Home California, for instance, homeowners monthly payment ratio must be cut to 31 percent of their gross household income, and up to $100,000 of principal can be reduced for each household. Related: Are mortgage-aid programs too little, too late? How mortgage reductions work varies by lender and government program, but the reduction is usually paired with another change in the mortgage. In the state program, borrowers seeking assistance could expect one of these scenarios: Principal reduction with a change in loan term, like extending the life of the mortgage from 30 years to 40 years. Principal reduction with a drop in interest rate, say, going from 6 percent to 5 percent. Principal reduction with changes to the loan term and interest rate.

Loan investors decide

The path that borrowers could take is determined by those who own the loans, also known as the investors. Though absent from negotiations, they have spelled out very clearly in servicing contracts whether they will entertain principal reductions. The servicing agreements lay out the parameters for what (servicers) are authorized to do, said Di Richardson, with Keep Your Home California. Investors who approve of mortgage write-downs make it clear how theyre willing to carry out them out. Preferences vary. In some cases, private investors go for the term extension first. If the principal reduction is done in connection with the federal mortgage-aid program, HAMP, then the borrower will likely see an interest-rate cut, assuming the borrower successfully completes trial payments. Other times, investors attempt a trial-and-error process in which a principal reduction is considered first to bring down the
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Can you Other times, investors attempt aget your mortgage reduced? What you should know | UTSanDiego.comconsidered first to bring down the trial-and-error process in which a principal reduction is mortgage payment to an affordable level. If that alone doesnt work, then the borrowers loan term is extended. If those two together dont work, then an interest rate reduction is added.

So far, roughly $5 million of mortgage principal has either been forgiven or is in the process of being forgiven in San Diego County through Keep Your Home California, just one slice of the national principal-reduction pie. Its unclear what kind of deals the majority of Keep Your California clients are getting, but two of the three borrowers that the U-T San Diego talked to said they received principal reductions along with a loan-term extension. The third borrower, Donna Marvel of the City Heights are of San Diego, received only a principal reduction with no other changes.

One borrowers story

Marisabel Garcia of Oak Park has supported two kids and a mortgage on one income following a divorce. Her financial worries worsened after a series of home repairs surfaced: a broken front door, a faulty heater and electrical wiring that was acting up. After hearing about the Keep Your Home California program on Spanish radio, Garcia, 47, immediately applied to improve her chances of keeping her home. After a thorough five-month process that involved reams of paperwork, she emerged with a permanent mortgage reduction that is saving her $600 a month. In Garcias case, her principal reduction was paired with a loan extension to 45 years, up from the original 30-year fixedrate loan she had before. The loan modification, it was perfect, said Garcia, who plans to live in her home long-term. I didnt notice the (loan extension) until later I will worry about that later, I guess I dont like that it prolongs the terms. As part of the program, a lien is placed on the home and is forgiven in five years if the borrower is in good standing. The amount that is forgiven could be taxable, but that depends on the borrowers situation, state officials said.

To reduce, or not reduce?

San Diego Countys largest lenders, Bank of America, Wells Fargo and Chase, say they have forgiven more than $6 billion in mortgage principal and plan to do more. It appears lenders still have some ways to go, factoring in their obligations to their 2012 settlement with 49 states and the federal government, and the fact that $7 trillion of home equity in the nation has been lost between 2005 and 2007. The last estimate from DataQuick showed that more than one in three homes with a mortgage in San Diego County is underwater. The reality of lost equity continues to push borrowers toward strategic defaults, in which homeowners decide to stop paying the mortgage. Principal reduction is a life ring to underwater homeowners from drowning in debt, said Murtaza Baxamusa, who directs planning and development for the Family Housing Corporation, of the San Diego Building Trades in Mission Valley. With a third of San Diego mortgages underwater, the attorneys general settlement will directly benefit our region. Others like Kurt Branstetter, loan officer and mortgage manager at W.J. Bradley Mortgage in San Diego, say principal cuts are not the answer. There is a moral hazard with selective principal reductions that cannot be overcome, he said. Bank of America requiring homeowners to be 60 days late on their payment to qualify will result in the worst possible outcome and most likely be the straw that breaks the camels back for the millions of homeowners who have honored their commitment by making their
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Can you get straw that breaks the camels backyour mortgage reduced? What you should know | UTSanDiego.com commitment by making their for the millions of homeowners who have honored their payments.

Regardless of your position, more principal reductions are expected to happen in the nation, especially in the hard-hit state of California. Keep Your Home California, the state program, no longer requires servicers to match program money dollar-for-dollar in order for a principal reduction to happen, a change that program officials hope will lure more servicers to the table. Related: More mortgage reductions in California? Another recent change that could drastically increase borrower participation is that struggling homeowners with mortgages owned by one of the mortgage giants, Fannie Mae and Freddie Mac, may have a shot at a home-loan reduction. The Federal Housing Finance Agency, which oversees Fannie and Freddie, has been a key voice in the principalreduction debate. An April report from the federal agency said upping the use of principal write-downs could encourage borrowers who are current on their mortgage payments to stop paying, in search of some kind of modification. The population of underwater borrowers current and delinquent remains a key risk for the Enterprises (Fannie and Freddie), taxpayers, the housing market, according to work-in-progress assessment, which left things open-ended. Have story tips, a hot property listing or a question? Email me: lily.leung@utsandiego.com | Tweet me: @LilyShumLeung | Subscribe to this blog. Copyright 2012 The San Diego Union-Tribune, LLC. An MLIM LLC Company. All rights reserved.

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