Principal Reductions Outpace Short Sales?

Some lenders may be more willing to reduce the mortgage principal than grant a short sale for borrowers under the Home Affordable Modification Program (HAMP). The principal reduction can mean big savings for home owners too — the average amount reduced on a principal reduction is more than $65,000, or 31 percent of the unpaid balance on the mortgage, according to new Treasury Department data.

Principal reductions under HAMP began in October 2010, serving as an alternative to a short sale or deed-in-lieu of foreclosure for cash-strapped home owners. Only loans not guaranteed by Fannie Mae and Freddie Mac are eligible for a principal reduction.

“The median loan-to-value ratio on modifications that went through principal reduction was 158 percent,” HousingWire reports in a recent article. “After the workout was complete, the borrower held an LTV of 115 percent, meaning he or she owed 15 percent more on the mortgage than the home was worth rather than being 58 percent underwater.”

Banks may find a principal reduction is better for them financially too. Banks report an average loss rate of 60 percent whenever borrowers complete a short sale, and an average 70 percent loss for homes in the foreclosure or REO process, according to Moody’s Investors Service.

Source: “Principal Reduction Outpaces Short Sales Under HAMP,” HousingWire (Dec. 12, 2011)