If you are the one of the approximately 20% of American homeowners that is upside down on their mortgage, meaning you owe more than your property is worth, a new program known as Principal Reduction may be just what you’ve been waiting for.
A Principal Reduction, unlike a loan modification which is only a temporary reduction in the interest rate a homeowner pays, is a permanent reduction in the outstanding loan balance owed. This program is offering upside down homeowners a way to stay in their homes and erase the negative equity the American nightmare of the past few years has cast them into. Whereas a short sale will destroy your credit and get you a potentially hefty tax bill for the “forgiven” debt, a Principal Reduction program will do neither. There is no negative impact on a homeowners credit rating and the reduction in principal is not recognized as income from a tax perspective.
Upside down homeowners who owe at least 25% more than their property is currently worth and can provide full documentation for their income can qualify. The homeowner must also have a Debt-to-Income ratio of 50% or less based on the new lower monthly mortgage payment. Debt-to-Income is based on a homeowners monthly gross income versus their debts, items that show up on a credit report (credit card payments, auto loan payments, student loans, etc).
The program is funded by a $5 Billion dollar hedge-fund that is essentially involved in a large scale Note Purchase program. The hedge-fund buys large groups of Notes, all of which are upside down homeowners, on what is known as the secondary market. The hedge-fund gathers Notes from clients across the country and leverages the portfolio to buy the entire group of Notes at a substantial discount to current market value. Due to the fact that an upside homeowner is likely to walk away from their property in the near future, the banks are often accepting these offers in order to rid their books of these potentially toxic assets. The hedge-fund then adjusts two items on the existing Note. The outstanding principal balance is reduced to 95% of current market value and the interest rate is changed based on the homeowners credit quality. In the end, the homeowner receives a permanent reduction in their principal balance, often to the tune of a few hundred thousand dollars, and the hedge-fund makes a profit on the difference between the purchase price and the new 95% of market value principal balance. A true win-win scenario for everyone. Even the banks walk away ahead as they have now rid themselves of future foreclosure risk and have the influx of capital to put to work in their business, which is lending. Homeowners who are disenchanted by the loan modification process and restrictions placed on them and want to stay in their homes, rather than just walk away from their property, or be forced into a short sale now have a viable option which appears to be far superior to either.
If you would like more information about a principal reduction program, visit http://www.upsidedown.us and watch their video presentation.
