Principal Reduction Programs Explained. Why Banks Would Do It.

There is still much confusion for many regarding a mortgage principal reduction and why a lender would be so eager to consider such a thing. Unlike a loan modification, where a homeowner basically begs a lender for mercy in hopes of getting a lower monthly payment, and in some rare cases a principal reduction, a principal reduction program (PRP) is quite different in many ways. Incidentally, national statistics show that loan modifications are successful only 8 to 12% of the time depending on what lender is granting the modification. This average is way below the federal government’s HAMP projection. Short sale success is also hitting the skids, so a principal reduction seems to be the way to go these days and for good reason.

Let’s briefly discuss what constitutes a principal mortgage reduction and what motivations a lender has in allowing the reduction. First of all, think of a federally backed principal reduction program as the recent “Cash for Clunkers” program. Trade in your old, beat up mortgage for a new, government funded reduced mortgage. Who wouldn’t want that? A PRP is a TARP/private sector investor cooperative designed to stimulate the economy and get money moving again. Here are some examples on how a principal reduction can benefit all parties:

HOMEOWNER-
1. Existing mortgage bought by a private investor
2. Mortgage over-encumbrance reduced to fair market value
3. Monthly payment almost always comes down because interest rate is about 6 1/2% (based on newer reduced loan amount)
4. Old loan on record as paid in full. (looks good on credit report)
5. No qual. Owner just needs verified income to meet 40% DTI ratio

PRIVATE INVESTOR-
1. Can get cash flowing investments at huge discounts.
2. Product is plentiful and easy to get
3. No real estate headaches
4. Can buy in bulk without much competition
5. Can select their own inventory without having to take “junkers”

BANKS-
1. Easily and cheaply unload non performing assets
2. TARP (Troubled Asset Relief Program) endorsed
3. New money to lend
4. 80% of their losses are covered by fed after the sale!!!!!!! Banks lose nothing.
5. Company stock values return

A Principal Reduction Program like ULTIMATE MORTGAGE RELIEF is an alleged win-win-win. The only loser is the tax payer who will foot the bill. In my opinion, this PRP will ultimately bankroll the big private investment firms that are in reality in partnership with the banks, so the economic impact is yet to be revealed, but in the long run, it can’t be good. Short term however, there will be a new kind of “run on the banks”; the likes of which we have never seen.

There should be no shortage of participants, so now is a good time to position yourself for some easy Equity Holding Trusts using the “How to Make Money on Houses Nobody Wants” training. Why? Because with new restructured loans on abandoned homes, owners will need some new solutions for occupancy and long term asset protection. There will also be plenty of resident beneficiaries coming out of the woodwork that can now afford the new monthly payments.

The PRP will last for only another couple of years because TARP (free unlimited government bail out money) is scheduled to end when President Obama’s term in office concludes. It could be extended if he is re-elected. We’ll have to wait and see.