Principal Reduction

Dear Ms. Olefson,
After my family and I saw your very interesting interview this past Sunday morning, we thought we may have finally found an attorney that may be able to help us save our home.
Respectfully yours, Donna


 

Dear Donna.  I’m so sorry to learn of your struggles.  As you know you are not alone. 

The first challenge most folks face in this situation is understanding whether you've not succeeded in your requests for a principal reduction because you're not eligible (in other words you don't meet the program criteria) or qualified (generally meet the program criteria but don't have the personal situation and facts – such as sufficient income - needed) or of your requests are just not getting through to the right people at the right time (fortunately, eligibility and qualification requirements as well as staff and training have improved over time).

Here are a few general observations that may help you either achieve the principal reduction you are hoping for or understand why it is not being and-or will not be granted so that you can get on with your life:

 

  • An alternative to a principal reduction may be a modification with a balloon payment at the end. You seem to not be considering the fact that your home will hopefully be worth more 20 or 30 or 40 years from now when the loan matures.  It's also worth checking on a refinance,  short sale or deed in lieu of foreclosures as last resorts.  You also seem to not be considering the fact that even if your credit is dinged by a short sale or deed in lieu you can eventually restore it and buy a home again if you wish to do so.  Millions of folks are doing just that.

 

  • If your loan is owned, insured or guaranteed by Fannie or Freddie, in addition to Wells Fargo's programs, you may be eligible for the PRA principal reduction, HAMP modification, HARP 2.0 refinance or HAFA short sale or deed in lieu of foreclosure program under Making Home Affordable. FHA also has its own similar programs.

 

  • When it comes to modifications most will begin by reducing your interest rate to as low as 2%, then increasing your amortization period and last may consider reducing principal.   They will use what's called the net present value or NPV test to determine if they bank-investor will recover more by granting your request or foreclosing.  With prices on the rise (your own emails indicate you said the home was with $90k and now it’s worth $160k – these big changes in valuations borrowers allocate to their properties is also one of the reasons banks will understandably  want to do their own appraisals before accepting your offer) and investors buying up homes for rentals (as you said your area has become), if you are able to buy your home from you bank it will likely have to be for full market value.

 

  • Generally principal reductions are the least likely solution banks will agree to.  I think the reasons for this are obvious.  Suffice it to say your bank - investors do not want to eat this loss any more than you do and would argue they are no less "victims" of these circumstances than you are.   Afterall, you presumably sought out and signed for an interest only loan of your own volition.   And it sounds as if you could not and still cannot afford to make principal and interest payments (notwithstanding the additional fact that the value of your home has dropped and you understandably do not want to).   This is not exactly what most folks would consider “sustainable-affordable homeownership.”  It sounds as if you, like many others, may have voluntarily assumed the risk by gambling that real estate values would continue to go up?

 

These decisions are based on numbers.  These numbers and rules of thumb (for example, you should never be paying more than a third of your income for housing and interest only loans-negative amortization loans come with big risks) could have saved a lot of folks a lot of heart ache had they been followed before the bubble and, hence, are being more strictly enforced now.

Hopefully that helps.  Good luck!

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