Megan McGinnis' Blog–Get Connected!

Principal Reduction Programs Gain Momentum

Principal reduction programs are gaining momentum in the market place because loan modifications are failing, seemingly a band-aid on a gaping wound.  Here is a brief run down of the difference between principal reductions and short pay refinances.  Principal reductions vary from short pay refinances, for those of you unfamiliar, by one element: these new principal reduction programs are backed by hedge funds who are buying in bulk non-performing notes from lenders and then refinancing the homeowners out of their existing loans at 90% of current market values.  The hedge-fund backed programs have deep pockets that purchase in bulk and make a profit on the margin–the difference between the amount they acquired the non-performing note for (typically between 50-65% of current market value depending on the location of the property) and the 90% that they “resell” the note for to the existing homeowner.   These programs also typically include refinance options for folks with good or bad credit.  With a short pay refi, the company goes directly to the bank to negotiate on a case by case basis, having less leverage than the bulk buyers in the new principal reduction programs being rolled out.  Similarly in a short pay refi, the negotiators are dealing with some of the same people in the over-worked, under-manned world of mortgage modifications and therefore are not having the success of the hedge-fund backed principal reduction programs.  We are seeing a shift out of short pay refi and loan mods into this new area of principal reduction programs.  The cost for each program is approximately the same as a loan modification which averages around $2500.

Hot off the press is this article from The New York Times if you’d like to read a little further on the topic…..

“Wall Street Finds Profits by Reducing Mortgages

November 23, 2009, 12:16 am


As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess, The New York Times’s Louise Story writes.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.”

Keep reading here…

Wishing you a joyous Thanksgiving, my favorite holiday.  Peace, Megan

Remember this…

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.  ~John Fitzgerald Kennedy