A handful of lucky homeowners have been able to reduce their
mortgage debt by nearly one-third under a little-noticed provision
of the government's Home Affordable Modification Program
(HAMP).
Called the Principal Reduction Alternative (PRA), it offers
incentives to investors to write down the principal on certain
types of mortgages as part of a HAMP loan modification. To date,
some 53,000 borrowers have qualified to earn principal reductions
averaging $65,000 each, or 31.3 percent of their pre-HAMP loan
balance.
That's a small fraction of the 1.7 million trial loan
modifications that have so far been granted under HAMP since the
program was launched in April 2009, and of the 833,000 that have
been given permanent status.
Fannie Mae and Freddie Mac mortgages excluded
The small impact is due in part to the fact that Fannie Mae and
Freddie Mac, which guarantee the majority of U.S. residential
mortgages, are not participating in the PRA program. That leaves a
fairly small pool of home loans that qualify.
In addition, PRA is relatively new, having been initiated in
October 2010.
The program rules for PRA require that mortgage servicers
evaluate homeowners for a principal reduction when they apply for a
HAMP loan modification, provided they have a non-GSE (Fannie Mae or
Freddie Mac) mortgage with a loan-to-value ratio of greater than
115 percent. However, they are not required to actually offer a
principal reduction as part of a HAMP modification and may
only do so when the investor holding the mortgage approves.
Principal reductions earned over three years
Borrowers who qualify for a PRA must earn the principal
reduction by staying current on their mortgage payments for three
years. Each year the loan remains in good standing, the borrower
receives one-third of the total reduction.
It is not clear whether Fannie Mae or Freddie Mac, which
are in receivership under the Federal Housing Finance Agency (FHFA)
will be amending their policies to allow participation in PRA at
any point. The HAMP program is due to expire at the end of next
year.