In addition to mortgage modifications, deed-in-lieu of foreclosure offers, New York bankruptcy, and other options, the federal government has finally created the effective solution that until now has been off the table for underwater homeowners: mortgage principal reductions. On April 14, the Federal Housing Finance Agency (FHFA) announced the Principal Reduction Modification program, which would target homeowners with “seriously delinquent” mortgages.
Here are a few facts about the program and its eligibility criteria:
- The Principal Reduction Modification program is essentially another refinancing program with a few special features. Homeowners will be given 40-year mortgages at current interest rates with any arrearages capitalized onto the loans’ principal balances. The principal reduction occurs later in the form of loan forgiveness, which might mean the IRS will treat it as taxable income.
- Unfortunately, the program only applies to mortgages held by either Fannie Mae or Freddie Mac. As a result, the program’s scope is quite narrow: The FHFA estimates only a scant 33,000 homeowners will be eligible at all. This amounts to 2 percent of all severely delinquent mortgages, as defined by the FHFA.
- Only owner-occupant homeowners can apply. The Principal Reduction Modification program doesn’t help people with underwater investment homes.
- Eligible homeowners must be 90 days delinquent on their mortgages by March 1, 2016. The goal is to help homeowners who have been struggling for a while, not those who have only recently run into difficulties.
- The unpaid principal balances on participants’ mortgages must be less than $250,000. Homeowners owing more will not be able to use the program.
- Homeowners’ mortgages must also exceed a 115-percent mark-to-market loan-to-value ratio, but this can include capitalized arrearages.
- Eligible homeowners can expect to receive solicitations from their loan servicers by October 2016.
The FHFA explains that the Principal Reduction Modification program is the final program it will offer to help underwater homeowners, meaning that those who do not take advantage of it or who are ineligible are on their own. Indeed, one reason it may not do so much good is that many mildly underwater homeowners are already out of negative equity. They may not have much, but the government isn’t interested in giving them principal reductions. In fact, Fannie Mae’s and Freddie Mac’s portfolios of underwater loans has fallen by 80 percent in the last four years.
The FHFA’s press release on the Principal Reduction Modification program can be found here.
Because the Principal Reduction Modification program helps so few homeowners, it’s important to point out alternatives. I wrote recently that downsizing can help above-water homeowners. Underwater homeowners can benefit from chapter 13 bankruptcy as well. An experienced New York bankruptcy lawyer can help you evaluate these options.
For answers to more questions about underwater mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Brooklyn NY Bruce Weiner for a free initial consultation.