In the wake of the housing crisis and economic downturn, many people are in need of mortgage assistance. And one of the best ways to help financially strapped, underwater homeowners may be through a mortgage loan principal reduction.
By curbing mortgage debt and lowering monthly payments, homeowners are able to stay in their homes and breathe a bit easier. Principal reduction is an important component of the mortgage assistance offered through the Hardest Hit Fund, which provides $7.6 billion to Housing Finance Agencies in 18 states and the District of Columbia to establish programs to help homeowners with their mortgage payments and avoid foreclosure.
The U.S. Department of the Treasury committed almost $2 billion in Hardest Hit funding for Keep Your Home California, administered by the California Housing Finance Agency. Four programs were established, each with specific goals and requirements, to help homeowners who have suffered a financial hardship through no fault of their own, such as a job loss, cut in pay, divorce or extraordinary medical expenses in the Golden State.
One of California’s programs allows out-of-work homeowners collecting jobless benefits to have their mortgage payments covered, as much as $3,000 per month for up to nine months while they look for work. Another program has provided homeowners with an average of $13,000 to “catch up” on their mortgage payments to avoid foreclosure. For homeowners who undergo a short sale or deed-in-lieu of foreclosure, a transition assistance program helps initiate a graceful exit from the home.
And because nearly 30 percent of all homeowners in California are underwater on their mortgage, meaning they owe more on their mortgage than the current value of their home, the Principal Reduction Program has been one of the most significant foundations of the four Keep Your Home California programs.
With the Principal Reduction Program, eligible homeowners – those who meet low or moderate area income limits, have suffered a financial hardship and owe more than their home is worth – can receive a reduction in their principal balance to get them to a loan-to-value ratio of 105 percent to 140 percent. Based on the most recently completed quarterly report, homeowners who qualified for California’s Principal Reduction Program saw the median principal balance on their mortgage drop an average of 30 percent, or from $320,000 to $223,000. The reduction in principal balance translates to a more affordable monthly payment for homeowners.
For example, homeowner Sharon P.’s monthly mortgage payment went from about $1,000 to less than $500 with the Principal Reduction Program, a big relief after suffering a layoff from her job and now living off of one income. There are literally more than 1,000 similar stories under the Principal Reduction Program, and nearly 25,000 statewide, from homeowners who have now been assisted through one or more Keep Your Home California programs.
Certainly, the cost savings are a huge benefit for the homeowner, but it’s also an economic boost for the community. Fewer homes enter foreclosure and sit empty, fellow homeowners enjoy more stable home prices, and nearby business owners have more people buying clothes, groceries and gasoline.
Keep Your Home California, including the Principal Reduction Program, debuted in February 2011. Several changes have been made during the past two years to increase accessibility to the program for struggling homeowners. One of these changes involved Keep Your Home California officials eliminating the dollar-for-dollar match for servicers, and taking on the full financial responsibility of the principal reduction.
Here’s how it works: mortgage servicers – the companies that collect your mortgage payments –need to approve the principal reduction application. From there, mortgage servicers modify or recast the loan with the new principal amount, creating a more affordable and sustainable mortgage for the homeowner.
The results have been astounding: Keep Your Home California now has almost 60 mortgage servicers participating in the Principal Reduction Program, including Bank of America, JPMorgan Chase and Wells Fargo. More servicers on board means more homeowners are now applying and being approved for the program – a 47 percent increase in fourth-quarter 2012 compared to one year ago.
It was an aggressive, out-of-the-box idea that yielded positive results. Many of the other Housing Finance Agencies in the Hardest Hit Fund have also made changes, fine-tuning and tweaking their programs in order to help more homeowners.
Because, across the United States, from California to Rhode Island, and from Michigan to Florida, all 19 Housing Finance Agencies have one overriding goal – to help homeowners keep their homes. And, fortunately, every single day, we are doing exactly that.
Claudia Cappio is Executive Director of the California Housing Finance Agency, which oversees Keep Your Home California.