Principal Reductions and Loan Modification without Hardship Requirements - A Response To DeMarco

By Michael Nazarinia, REST Report Matters

Mr. DeMarco, who is the head of the FHFA and is a Republican, sees such a large moral danger in people cheating by going late on their mortgage to get a principal reduction and applying for a loan mod while lying about their hardship to get a principal reduction that he does not favor principal reductions, even though nearly a million homeowners with Fannie or Freddie as the investor, with current real hardships will be helped by it.

The NPV is higher on each and every loan disposition analysis we see at the REST Report Matters by doing this under the HAMP PRA Home Affordable Modification Program Principal Reduction Alternative -- a program that Fannie and Freddie are not participating in but they should --  despite the higher NPVs for these types of mods.

It is my opinion that the hardship requirement for a mortgage modification on a home with an LTV of 75% or higher and FICO of 750 or lower should be completely eliminated. 

If Fannie and Freddie can make loan mods at 2% and 40 year term, that is fixed for 5 years and that goes up to today's 30 year fixed rate of 4%, as they are doing every day, then that should be a program offered to all people seeking a refinance with a loan to value of above 80% who are not delinquent and do not have a hardship.

Its already bad enough that there is so much paperwork in the mod process and now they are making it harder to apply for a mod by requiring proving more of a hardship (see Chase's new forms for loan mods, page 5) and leaving the decision of a hardship up to the same people who make the most money in a foreclosure sale (they collect all fees for foreclosure and delinquent servicing first before the investor gets the remaining money).

If you have no hardship and can "afford" 2% and 480 month term on the full principal of your loan by current income documentation requirements and are ok with the loan moving up to 4% after 5 years, then you should be FAST TRACKED to approval while you are current or delinquent. The only leniency should come from not having to prove more than 3 to 6 months of documented income that is stable and consistent and the "right" amount per my example below.

All that would be required is income validation and verification under current guidelines in my proposal and negative to near negative equity, a loan to value of 80% or higher, as most people with less than 20% equity have a difficult time selling their home with enough money left over to move laterally or upward to another home.

For example, if your loan is $200,000 and the home is worth between $160,000 or greater, then the principal and interest on this at 2% and 480 month term would be $604.64 and assuming $400 a month for HOA, property taxes and insurance, your PITIA payments would be $1,000.47 so you would need $3,227.32 in proven monthly income per month to qualify ($1,000.47/$3,227.32 = 31%). NO homeowner hardship should be necessary since the homeowner would be keeping a home with negative equity and the real hardship is the investor losing the $40,000 plus another 30% of the $160,000 from the foreclosure process, a total loss of $88,000. Even if foreclosure recovery yielded a 20% discount from $160,000 market value, that is still a loss of $72,000 for the investor and that is a huge hardship for the investor I would think if it were really their money they loaned out.

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