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FED Finds Principal Reduction Programs Actually Work
Well it certainly seems more logical that a principal reduction program would work better than a loan modification which is just a temporary fix. The FEDs findings support this. A loan modification is merely a reduction of the current interest rate and does not address the value of the home at all. Principal reduction programs, on the other hand, reduce the mortgage (not the interest rate) to current market levels. If you live in an area where the home values have fallen by half, then it hurts to write out that monthly payment when you could walk down the street and buy the same property for half the price of what you are currently paying. There is very little incentive for upside down home owners to keep making that payment. Now there is a reason to stay put because principal reduction programs will reduce your principal to current market values, sometimes lowering your monthly payment by as much as half.
The following is an excerpt from DSNews.com by Carrie Bay
Fed Study Finds Principal Writedowns Minimize Risk of Redefault
Servicers who lower distressed homeowners’ mortgage payments by reducing the principal balance, as opposed to just making interest rate adjustments, are much more likely to see the payments keep coming in and ward off a redefault, according to a new study published by the Federal Reserve Bank of New York.
The economists found a definite pattern among modifications made since December 2005 that suggests “an intention among servicers to make the loans more affordable, while not losing any of the underlying principle.” However, their analysis shows that modifications that trim off some of the loan balance have higher rates of success and “can double the reduction in re-default rates.”
While principal writedowns essentially mean the lender or investor must eat a loss, many analysts argue that it’s a smaller loss than comes with the eventual foreclosure and the price tag of a nonperforming asset in today’s housing market, already swollen with REO inventories and vacant properties.
According to the New York Fed’s economists, when a borrower’s monthly mortgage payment is cut by 25 percent by reducing the interest rate only, the borrower is 11 percent less likely to default within one year.
To read the complete article, click here…..
Thanks for stopping in. Please add a comment & join my newsletter. Peace, Megan
8. January 2010 at 1:28 pm
So how do you get you lender to agree to do this. My lender will not reduce interest rate or principal because I have not allowed my loan to default, but I have let other things suffer to keep my mortgage current to I would not get into a foreclosure situation.
8. January 2010 at 3:40 pm
That is a good question since most lenders will not talk to you about modification until you are three months behind on your mortgage, which will show on your credit. I would suggest talking to a good loan modification company, one that is reputable (Check them out on the better business bureau site bbb.com). Or talk to a real estate attorney. Most lenders will not talk to the actual home owner when it comes to modifying their loan anyway. This is when a short sale ends up occuring, because the home owner has tried to work with the lender unsuccessfuly. Loan mod companies and attoneys seem to get the banks attention and can ward off that foreclosure or short sale situation for an extended amount of time. Thus giving them time to modify the loan to help the home owner keep their home. But check out how much it will cost. They don’t work for free. Make sure to read ALL of the fine print before signing anything. Get advice from other attorneys and financial and tax advisors. Make sure to cover all of the bases.
9. January 2010 at 6:26 am
Pam,
You can’t do the negotiations as the homeowner or as a loan mod negotiator. This is done at a level you don’t have access to as the mortgage holder. With a principal reduction program a group of investors (a hedge fund actually) goes in and buys the note from your current lender at a discount. Then the hedge fund refinances you out of their position at 95% of current market value–that’s the part where you ARE involved. There are several companies doing this but the one I like can be found here
http://www.OWNavigators.com
9. January 2010 at 6:30 am
Flora,
Loan mods don’t typically offer principal reductions, attorney backed or not. Principal Reductions are an entirely different program and strategy. It’s a rare occasion when you’ll get a principal reduction inside a loan mod. It’s about a .5% chance.
Check out this other post: http://megan-mcginnis.com/661/principal-reduction-vs-loan-modification-which-do-you-choose-to-save-your-home/
Thanks for participating in this discussion.
Peace
Megan
http://megan-mcginnis.com
9. January 2010 at 8:36 pm
Megan, thanks for posting this article. I also work with the same company as yours, and am referring homeowners who want to stay in their homes to them. That really is the best way to go, because the banks will NOT reduce the principal during the loan mod.
Angella Raisian @ http://AngellaRaisian.com
P.S. I hope you don’t mind me reposting your article on my blog. You have great info on yours, I always check it for new info.
Angella Raisian´s last blog ..Article Marketing Secrets Video
19. January 2010 at 1:36 pm
Well, of course it does! Does anybody else think that it is amazing it took a study to figure this out??? Didn\’t we all know this? Now, how to get the banks to agree to this…..how this doesn\’t take another four years!!!!! How stupid is this really!!!
1. February 2010 at 7:54 pm
Yes, it’s amazing how especially slow the big banks are. They are not negotiating like the small ones who are quick to respond and get transactions done. Bank of America and Wells Fargo are two of the worst. If you have a small bank, come and see me!
Peace
Megan @ http://ownavigators.com
Megan McGinnis´s last blog ..2010 New Year’s Resolutions