Since the housing crisis began we have all been talking about reducing the principal balances of underwater mortgages as a way of addressing the foreclosure crisis and keeping homeowners in their homes. As a Florida foreclosure defense attorney, I continue to fight this battle each and every day.
It's now been announced that the Treasury Departments new Principal Reduction Alternative (PRA) program is scheduled to become effective on October 1, 2010. Although it was originally scheduled to be released on June 1, 2010, it's now getting close because servicers received the Supplemental Directive this week, even though none of the actual formulas arrived, as there is still some testing underway.
What is the Principal Reduction Alternative?
The PRA is a "deferred principal reduction program" that allows the homeowner to earn a principal reduction over a three-year timeframe by making all payments in accordance with the loan's modified terms. According to Supplemental Directive, the PRA is: "… designed to give servicers additional flexibility to offer relief to borrowers whose homes are worth significantly less than the remaining amounts owed under their first lien mortgage loans
(negative equity)."
Under the PRA, servicers are required to evaluate the benefit of principal reduction for every HAMP eligible loan with "high negative equity," which Treasury defines as having a mark-to-market loan-to-value ratio greater than 115%. The language found in the directive says that servicers are: "… encouraged to offer principal reduction whenever the net present value (NPV) result of a HAMP modification using PRA is greater than the NPV result without considering principal reduction."
Treasury will be introducing an "Alternative Modification Waterfall" test that servicers are to use in performing this evaluation, and Step 2, in the Alternative Waterfall test, incorporates a principal reduction. To encourage servicers to participate in the PRA, the Treasury is offering new financial incentives.
The PRA dictates that servicers must evaluate any loan being considered for HAMP, with a mark-to-market loan-to-value ratio greater than 115%, using both the Standard and the Alternative waterfall test.
The loan's unpaid principal balance should be determined after capitalizing amounts just as is done now under the current HAMP guidelines. Servicers are being instructed to follow regulatory and investor guidance to select the appropriate valuation method that will be used in determining the mark-to-market value of the property. Then they are to use that value for both the NPV model and the MTMLTV calculations.
Here is how Principal Reduction will be treated…
Initially, principal reductions under the PRA should be treated as a non-interest bearing principal forbearance, which will be referred to as the "PRA Forbearance Amount." Borrowers in good standing on the first, second and third anniversaries of the trial period's effective date, the servicer MUST reduce the principal balance of the loan in three installments of one third of the initial PRA Forbearance Amount on each year, on the loan's anniversary date.
Homeowners who receive a principal reduction under the PRA will be notified that principal reductions are reported to the Internal Revenue Service and may have tax consequences, and new documents will advise homeowners to seek guidance from a tax professional.
However, the bad news is that the Treasury Department has made it clear in the Supplemental Directive that servicers are free to conduct other internal evaluations… IN ADDITION TO THE NPV 4.0 EVALUATION… in order to ensure that such reductions are in the best interest of investors. And of course these additional "internal evaluations" are not being disclosed.
The good news is, as we announced earlier this week…
"The Carman Law Firm was granted one of the exclusive licenses for law a firm to use a loan disposition analysis platform, just like the major banks and servicers use, and it is already being updated for HAMP Version 4.0, and the Principal Reduction Alternative Program."
As I continue to stress to homeowners over and over again; it's truly important that homeowners wanting to remain in their homes, or even wishing to liquidate their property and get out from under without any deficiency, seek the advice and guidance of an experienced Florida foreclosure defense attorney… their economic future depends on it.
We do not charge for an initial consultation
, so there is no cost for you to see if we can help.
Call us today for a FREE initial consultation (561) 392-7031