Despite increased government efforts to help underwater homeowners, many are still finding themselves denied for loan modifications and in foreclosure. The Home Affordable Modification Program (HAMP) is just one of a handful of federal programs designed to help homeowners, but whose efforts have been disappointing at best. Barely one-third of homeowners who would qualify for mortgage modifications under the HAMP have been reached, leaving many to question where the snags are in the system.
Perhaps one of the more disappointing efforts of the HAMP has been the failure of many to receive mortgage writedowns as offered. The HAMP has a provision for qualified homeowners to receive a significant reduction in their principal amount owed. The Principal Reduction Alternative (PRA) offers incentives to lender to write down the principal on certain mortgages, as a type of loan modification assistance. So far, only a small fraction of borrowers have successfully received the write down, lowering their loan balance by nearly 30%.
It is no secret that lenders shy away from mortgage writedowns, even more so than a traditional loan modification. Fannie Mae and Freddie Mac have yet to participate in the PRA program to date, leaving very few big lenders in participation. Further, qualification standards among lenders require that homeowners have a loan-to-value ratio greater than 115 percent in order to qualify for the PRA program, weeding out many that desperately need the help but fail to qualify. With the HAMP program set to expire next year, many are concerned about what that means for the fate of their underwater mortgages.