Fannie Mae and Freddie Mac (collectively Frannie) will soon participate in California’sPrincipal Reduction Program (PRP). This reluctant change of heart was prompted by the announced June 2012 removal of the rule requiring lenders to match any funds PRPoffers homeowners.
PRP has been around since February 2011 as one of the federally funded efforts ofKeep Your Home California, but has seen little bank participation due to the requirement forcing lenders to match any funds PRP provides a homeowner receiving a principal reduction, otherwise known as a cramdown.
To qualify for PRP, the homeowner must have a mortgage both owned and serviced by participating lenders, thus Frannie’s participation is crucial, as it owns 62% of home loans in California, according to the state’s attorney general office. However, even at its best, the program will only be able to provide cramdowns to 9,000 California homeowners due to the minimal federal funding available and lack of lender contribution. California has 2,041,276 homes with a mortgage exceeding the value of the home, according to the most recent data from CoreLogic. Thus, this program will be able to offer cramdown assistance to just 0.45% of all California underwater homeowners.
To qualify for PRP, a homeowner must have:
- ownership and occupancy of the home as his primary residence;
- a home loan which is both owned and serviced by PRP participants;
- a first mortgage originated on or before January 1, 2009;
- an unpaid principal balance on that mortgage below $729,750;
- a loan-to-value (LTV) ratio greater than 115%;
- an income which meets county-based income limits;
- completed and signed a Hardship Affidavit;
- an income able to sustain the modified payments set by the servicer; and
- defaulted on the mortgage or be in imminent risk of default.
Other changes include increasing the maximum total allowed contribution from PRP to $100,000 per household. This is up from PRP’s $50,000 contribution toward principal reductions, which the bank was required to match prior to these revisions. Thus, even without the fund-matching requirement, homeowners may essentially receive the same maximum principal reduction with PRP’s increased contribution.
Bank of America (BofA) is the sole large lender currently participating in PRP, and is only approving homeowners who also qualify under the Home Affordable Modification Program (HAMP). Thus, homeowners with a loan serviced by BofA may combine benefits from both PRP and HAMP to allow for the most affordable revised payment plan.
If BofA services the loan, the homeowner must contact BofA directly to apply for the program. As for other lenders, homeowners may contact Keep Your Home Californiaat 888-954-5337 or their servicer to begin the application process.
Any principal reduction by Frannie is definitely a step in the right direction. With PRP paying for everything, their very limited funds are absorbed that much faster, limiting the number of homeowners who will be able to take advantage of the benefits. However, since most banks refused to go Dutch on cramdowns, this is an inevitable solution.
Still, lenders benefit from PRP as it assists homeowners avoid default, which in turn helps lenders keep their portfolios in the black – essentially an unearned gain for lenders who are the only financial winners in this game as the homeowner had nothing and still has nothing, but a fresh start with no equity – but also no negative equity.
We applaud BofA for being the first (and only) big lender to step up to the PRP plate. Currently, there are 14 servicers participating, though the other heavyweights, Wells Fargo and JPMorgan Chase, have said they will evaluate the program’s changes and then consider participating. We’ll see.