Lucky Few Get Big HAMP Writedowns

By:: Kirk Haverkamp | December 13, 2011

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.

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